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Alliance Bernstein

PRI reporting framework 2018

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(Proxy) voting and shareholder resolutions

Overview

LEA 15. Voting policy & approach

New selection options have been added to this indicator. Please review your prefilled responses carefully.

15.1. Indicate whether your organisation has a formal voting policy.

15.2. Indicate what your voting policy covers:

15.3. Attach or provide a URL to your voting policy. [Optional]

15.4. Provide a brief overview of your organization’s approach to (proxy) voting.

As an investment adviser, we are shareholder advocates and have a fiduciary duty to make investment decisions that are in our clients’ best interests by maximizing the value of their shares. Proxy voting is an integral part of this process, through which we support strong corporate governance structures, shareholder rights, and transparency.  We believe a company’s environmental, social and governance (“ESG”) practices may have a significant effect on the value of the company, and we take these factors into consideration when voting. We approach our proxy voting responsibilities with the same commitment to rigorous research and engagement that we apply to all of our investment activities.  Our policy is to vote all proxies in a timely manner, for the full number of shares, for all securities held in client accounts for which we have proxy voting authority, whenever it is administratively and logistically possible to do so.

Our Proxy and Governance Committee has ultimate oversight for our proxy voting policy and procedures.  This group is comprised of portfolio managers, the Head of Responsible Investment, our Governance analyst, ESG analyst, Legal and Operations who meet several times a year to address policy and procedural issues. 


Process

LEA 16. Typical approach to (proxy) voting decisions

16.1. Indicate how you typically make your (proxy) voting decisions.

Approach

Based on

16.2. Provide an overview of how you ensure your voting policy is adhered to, giving details of your approach when exceptions to the policy are made (if applicable).

Our Proxy Voting and Governance Policy is annually reviewed, and updated as necessary, by the Proxy Voting and Governance Committee (which includes senior members from Investments, Legal & Compliance, and Operations) to ensure it captures our latest thinking and reflects new governance issues. Our Proxy Voting and Governance Committee meets at least three times per year and as necessary to address special situations.

Our RI team votes our proxies globally. In evaluating proxy issues and determining our votes, we welcome and seek out the points of view of various parties. Internally, the RI team may consult the Proxy Voting and Governance Committee, Chief Investment Officers, Directors of Research, and/or Research Analysts across our equities platforms, and Portfolio Managers in whose managed accounts a stock is held. This ensures consistent application of our policy while at the same time leveraging the company specific knowledge of the investment teams who can provide an extra level of insight. Externally, we may engage with companies in advance of their Annual General Meeting, and throughout the year. In addition, we engage with shareholder proposal proponents and other stakeholders to understand different viewpoints and objectives. We believe engagement provides the opportunity to share our philosophy, our corporate governance values, and more importantly, affect positive change.

Our Proxy Voting and Governance Policy and our historical voting records are available on our public website. 

16.3. Additional information.[Optional]


LEA 17. Percentage of voting recommendations reviewed (Not Applicable)


LEA 18. Confirmation of votes

New selection options have been added to this indicator. Please review your prefilled responses carefully.

18.1. Describe your involvement in any projects to improve the voting trail and/or to obtain vote confirmation .

          Our proxy processing agent confirms receipt of votes with the custodian. We have begun to review the end-to-end vote confirmation process and have participated in industry events and calls with organizations such as the Council for Institutional Investors and leading vote tabulator, Broadridge.
        

18.2. Additional information. [OPTIONAL]

          
        

LEA 19. Securities lending programme

New selection options have been added to this indicator. Please review your prefilled responses carefully.

19.1. Indicate if your organisation has a securities lending programme.

19.3. Indicate how voting is addressed in your securities lending programme.


LEA 20. Informing companies of the rationale of abstaining/voting against management

New selection options have been added to this indicator. Please review your prefilled responses carefully.

20.1. Indicate whether you or the service providers acting on your behalf raise any concerns with companies ahead of voting

20.2. Indicate whether you and/or the service provider(s) acting on your behalf, communicate the rationale to companies, when , you abstain or vote against management recommendations.

20.3. Additional information. [Optional]

As active owners, we value constructive dialogues with companies. Explaining our voting rationale for an “abstain” or “against” vote can be part of these discussions, and, in some cases, is important to promote change at the company. There are companies with whom we have ongoing discussions over multiple years.   These discussions occur after we cast our vote.  


Outputs and outcomes

LEA 21. Percentage of (proxy) votes cast

21.1. For listed equities where you and/or your service provider have the mandate to issue (proxy) voting instructions, indicate the percentage of votes cast during the reporting year.

Votes cast (to the nearest 1%)

99 %

Specify the basis on which this percentage is calculated

21.2. Explain your reason(s) for not voting certain holdings

          Abstain was not an option.
        

21.3. Additional information. [Optional]


LEA 22. Proportion of ballot items that were for/against/abstentions

22.1. Indicate if you track the voting instructions that you and/or your service provider on your behalf have issued.

22.2. Of the voting instructions that you and/or third parties on your behalf issued, indicate the proportion of ballot items that were:

Voting instructions
Breakdown as percentage of votes cast
For (supporting) management recommendations
84 %
Against (opposing) management recommendations
14 %
Abstentions
2 %
100%

22.3. Describe the actions you take in relation to voting against management recommendations.

          We vote shareholder resolutions based on our Proxy Voting and Governance Policy. Each year, before the start of the proxy season, our Proxy Voting and Governance Committee reviews our firm's Policy to ensure it captures our latest thinking. At that time, we also formulate our approach to new shareholder proposals. In cases where new issues arise during the voting process, we convene a portion or all of our Proxy Voting and Governance Committee to discuss and develop a policy or come to a decision on an individual proposal. Our policy includes a separate section on Environmental, Social, and Disclosure Proposals and we generally support proposals that seek increased disclosure where we believe they provide insight to shareholders and are not overly burdensome.
        

22.4. Additional information. [Optional]


LEA 23. Shareholder resolutions

New selection options have been added to this indicator. Please review your prefilled responses carefully.

23.1. Indicate if your organisation directly or via a service provider filed or co-filed any ESG shareholder resolutions during the reporting year.

23.6. Describe whether your organisation reviews ESG shareholder resolutions filed by other investors.

We generally review all shareholder proposals filed by others.   We vote shareholder resolutions based on our Proxy Voting and Governance Policy. Each year, before the start of the proxy season, our Proxy Voting and Governance Committee reviews our firm's Policy to ensure it captures our latest thinking. At that time, we also formulate our approach to new shareholder proposals. In cases where new issues arise during the voting process, we convene a portion or all of our Proxy Voting and Governance Committee to discuss and develop a policy or come to a decision on an individual proposal.  In addition, we may engage with shareholder proposal proponents and other stakeholders to understand different viewpoints and objectives.

23.7. Additional information. [Optional]


LEA 24. Examples of (proxy) voting activities

New selection options have been added to this indicator. Please review your prefilled responses carefully.

24.1. Provide examples of the (proxy) voting activities that your organisation and/or service provider carried out during the reporting year.

ESG Factors
ESG issue
          Risk assessment reports addressing climate risk
        
Conducted by
Objectives

Objective: Review the company’s approach to generating adequate risk assessment reports addressing climate risk.

Background:  Climate Change Reporting Proposal: In 2016, we supported a climate risk-related shareholder proposal that requested more information on the company’s risk assessment of the impact of climate change regulation in a 2-degree Celsius carbon-constrained market. This proposal received over 40% support in votes cast at the company’s annual meeting, which at the time was one of the highest levels of support for a shareholder proposal in company history. This was also the first year that this proposal appeared on the ballot, which makes the result even more impressive. 

Company’s Response: In early 2017, shareholders filed an identical proposal to annually assess portfolio impacts under the 2-degree Celsius scenario. This proposal was eventually withdrawn due to the company’s issuance of a climate-related assessment that directly addressed shareholders concerns from the original proposal. This more comprehensive assessment addressed the company’s view on long-term fundamentals of the energy industry, climate change risk management and business planning processes, and included items from the original Celsius proposal. The company also agreed to generate a follow-up report in early 2018. 

Scope and Process

Our Head of Responsible Investment and our Governance Analyst met with the company in May 2017. The purpose of this meeting was to understand the company’s approach to generating a full climate risk assessment report that would address shareholder’s concerns. The company explained that it was intending to issue such a report, and shared with us how exactly it was going to structure the report. 

Approach to Risk Report: The company went through an analysis to best determine how to conduct the climate-related risk impact assessment. This included an external review by an independent consultant hired to make recommendations on what to target, how to conduct the review, and how to report the findings.  

Risk Report Methodology: The company explained that the most likely structure of their eventual report from the consultant will be to use the International Energy Agency’s “450 Scenario”. This scenario sets out an energy pathway with the goal of limiting the global increase in temperature to 2°C by limiting concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2.  

Outcomes

Ultimately, we concluded that the company was adequately responding to shareholder requests for a climate risk assessment report and voted in favor of all Board members at the annual shareholder meeting.  The company is targeting to release the second assessment in early 2018.  We expect this report to disclose the methodology used, any actionable items from the report, and how the Board of Directors is assessing its findings. The company stated that the Board’s Governance Committee was taking the lead on the issue and will report to the full board.  We will continue to monitor and engage on the issue in 2018.

ESG Factors
ESG issue
          Proxy Contest
        
Conducted by
Objectives

Objective:  Engage both sides of a contested meeting to come to our vote decision.   

Background:  Performance had stalled for several years at the company, and market share was being lost to several competitors.  The company has an insular culture of promoting from within, and it became increasingly clear to us that the company may not have the right personnel in place to effectively change strategy to compete as needed in the changing consumer landscape. For this reason, a large institutional shareholder put forth a nominee as a new director to the Board. The shareholder was not advocating for the removal of the CEO or any other current director, but rather sought to address overall issues with organizational structure, competitive strategy and lagging overall relative performance by working more directly with the current Board and management team.  

In September 2017, several of our portfolio managers, along with our Head of Responsible Investment, and our Governance Analyst, met separately with company management and the dissident shareholder a nominee.

Scope and Process

The Company:  Management recognized that there was growth and revenue stagnation, and believed they were implementing an appropriate strategic plan to address it. We knew of the plan and sought further understanding on its progress.  They discussed some progress over the past 18 months, and acknowledged they needed more time with the new CEO and current Board to see the strategy fully realized.  The company noted that it had replaced two directors over the past few years and believed the current Board composition was the strongest it had been in years. 

The Dissident Shareholder Nominee: When we met with the nominee, he reiterated his support for current management but noted that the pace of change was simply too slow. He was proposing a new growth strategy in which company management would be restructured to more effectively manage each segment of the business.  To bolster his case, he noted several brands that the company owns that were once “gold-standard” but that have increasingly lost market share in recent years.  Additionally, he noted that the company had not been engaging him in good faith and that the insular culture at the company was a hurdle that needed to be addressed. 

Outcomes

We ultimately sided with the dissident shareholder.  While there had been some positive change under new leadership at the company, we agreed that this change had been too slow in occurring.  Profit margins should be much higher given the premium prices the company’s brands command, suggesting prior cost-cutting measures have been ineffective. The shareholder nominee has extensive consumer product goods experience, which the Board lacks, and brings a strong record of enhancing value at the companies he has been a shareholder of.  This shareholder nominee ultimately won a Board seat at the company. We continue to monitor this company’s progress and engage the company.    

ESG Factors
ESG issue
          Proxy Contest
        
Conducted by
Objectives

Objective:  Engage both sides of a contested meeting to come to our vote decision.

Background:  The company has eleven full-service banking locations in the rural communities across the state.  

Over the last several years, the company has seen high turnover of the CEO role:  the company is currently on its fourth CEO in seven years. In addition, we think the company has underperformed its potential, and it is unclear that the company has a strong strategy in place for future growth.  The instability of executive leadership, coupled with the Board’s lack of an explanation for the departure of its most recent CEO, is cause for concern.  

This concern led the bank’s largest shareholder, a private equity firm, to nominate a new member to the bank’s Board of Directors to establish a voice in the boardroom that, in the shareholder’s view, would help maximize shareholder value and potentially stabilize the CEO position.  

Scope and Process

We engaged company management and the dissident shareholder and their nominee separately.   

Fellow Shareholder: In our discussion, we learned that for the past several years, this shareholder had regularly requested strategic plans from the Board that included a detailed path to improve the company’s return on equity. Yet, the company remained reluctant to disclose specific business plans, strategic assessments, Board process, or the Board’s role in oversight of strategy.   

The Nominee: During our meeting with the nominee, he conveyed his background and strategy for improving the Board. In addition to being invested in the company, he was also actively invested throughout the banking sector, and brought years of financial services experience and knowledge of the industry to our discussion.  He shared our concerns over the CEO turnover and said he intended, if elected, to also seek nomination to the Board’s Nominating Committee, to try and bring some stability to the CEO role.   

The Board and Company:  Details surrounding the most recent CEO departure were vague, which concerned us. Additionally, neither the company nor the Board appeared to understand exactly what the bank’s current strategy was, nor what specific changes needed to occur to improve performance. 

Outcomes

Ultimately, we sided with the dissident shareholder, noting the need for a change in Board composition and stability of the CEO role.  The dissident shareholder nominee did not receive the required votes to be added the Board. Despite not winning the proxy contest, the dissident shareholder has been actively pursuing other measures, including pushing for the company to consider buyout offers from acquiring institutions. So far, the Board has ignored such offers and instead appointed a new CEO. We continue to closely monitor this situation and will continue to engage with management and the Board as necessary.  

ESG Factors
ESG issue
          Board Composition
        
Conducted by
Objectives

Objective: Review recent changes in Board composition and management.  

Background: Our Concentrated US Growth Strategy has had a multi-year investment in this American coffee company and coffeehouse chain. 

In September of 2017, the company recruited one of the independent members of its Board of Directors to the role of President and COO of the company.  The now-President and COO remained on the Board as well, and thus became the third Executive Director on the Board, in addition to the CEO and the Executive Board Chairman. That is a large executive presence for a non-controlled company, and raises questions about the effectiveness of the independent directors.   

We reached out to the company to understand their rationale for keeping this executive on the Board when she is now also a key executive overseeing the day-to-day operations of the company. We also wanted to understand the plans for Board composition going forward.

Scope and Process

During our engagement in October of 2017, the company provided us with some explanation for the move:  30% of the current Board had been appointed in the last two years, including the executive in question. Two Board members were retiring in 2017, and two more Board members would be reaching retirement age shortly thereafter. In addition, the founder/CEO had recently relinquished his CEO role.  Their purpose in keeping this executive as a director on the Board was in part to maintain some continuity of Board composition, and was also part of the CEO succession plan.  

The company noted that this Director’s expertise in driving sales growth for some of the world’s largest public companies, and her extensive insight on large-scale retail operations, supply chain logistics, consumer products, distribution, product management, digital technology, innovation, international operations, and distribution are all highly-sought-after qualities that served both company management and the Board of Directors well. 

The company did acknowledge that its Board Nominating Committee is continually evaluating the Board structure, with a focus on optimizing and enhancing to support the evolving needs of the business. We were told we could see some new nominations to take this executive’s place within the year.

Outcomes

We supported all Board members at the company’s annual meeting, as we accepted their rationale for current Board composition as sufficient.  We expect the Board to increase its independence as the company completes its current CEO/Founder succession plan.   

ESG Factors
ESG issue
          Board composition, executive compensation construction, and other governance matters
        
Conducted by
Objectives

Objective:  Obtain updates on this company’s Board composition, executive compensation construction, and other governance matters ahead of the proxy vote related to the annual general meeting.  

Background:  We hold this large, multi-national retailer in our Large Cap Growth portfolios and have a multi- year engagement history with this company.  

Since our last governance meeting with t this company in November 2016, the company has made progress on several items we had previously engaged on.  The company implemented proxy access per the framework we prefer.  The company increased the level of independence of their Board, and added technology expertise and ethnic diversity with the addition of a new Board member. Following the passing of the Executive Chairman, the long-tenured lead independent director became the independent Chair. We saw this as a strong structural governance change at the time, but we will monitor if the Board member who was chosen for the role and his nearly 30-year Board tenure was the strongest individual choice. He clearly has the credentials, but his tenure could call independence into question.

Scope and Process

We met with this multi-national retailer in November 2017 to discuss key governance matters:     

Executive Compensation: Overall, the plan is decently structured. However, pre-tax income is used in both compensation plans, possibly duplicating pay for performance.  We want differentiated return-based metrics on a per-share basis, and the inclusion of a relative metric in the long-term plan.  Additionally, the performance equity plan uses a one-year performance period but five-year vesting period.  We want the performance period lengthened to at least three years. The company is currently reviewing.  

Board Composition: A Chinese national had been a priority for Board refreshment, but the company has not found the right person, and is now seeking someone with Chinese market exposure instead.  We expect this person to be added.  We have suggested Committee leadership refreshment is in order, especially for Audit. We wanted technology expertise on the Board, given meaningful cybersecurity risk. The company added a director with a technology/security background to lead cyber oversight for the Board.   

Other Governance Items: We wanted to see the super-majority vote requirement for by-law amendments reduced, and the plurality vote standard for Directors changed to a majority vote standard. 

Outcomes

We voted in favor of all Board members and executive compensation proposals, but also voted in favor of a shareholder proposal to adopt a simple majority vote standard for by-law amendments. We believed this would increase shareholder access. This proposal ultimately passed as well. 

ESG Factors
ESG issue
          Proxy contest
        
Conducted by
Objectives

Objective:  Seek to influence change at this company by replacing Board members, including the Chairman, at this contested meeting. 

Background: This US company owns, operates, and franchises casual dining restaurants. We have been top shareholders for at least three years, with the company held in our Small and Mid-Cap Growth strategies. We have been disappointed with the company’s execution of its business strategy:  

Poor Allocation of Capital: The company’s franchisee organizations are more effectively run than the company-owned stores and produce a superior return on invested capital. Adding more franchisees would increase both revenue and operational efficiencies. Yet, the company remains focused on buying stores instead, a poor allocation of capital. 

Uninspired Leadership: The search for a new CFO took far too long, and the company missed an opportunity to recruit a world-class executive who would be a strong CEO successor candidate, instead hiring a relatively unproven candidate. The company also failed to address the legitimate concerns of an activist shareholder who met with the company three times to express concerns over the company’s management.  

Ineffective Board: The Board has made several missteps, including failure to properly engage the activist, missed opportunities with the CFO recruitment, and poor capital deployment.  

Scope and Process

We believed that several members of the Board needed to be replaced with stronger members who had direct operating experience. As such, in May 2017, we engaged company management, the Board, the activist shareholder, and a proxy advisory firm ahead of our proxy vote.  

Company Management: In our discussions with company management, it became further apparent to us that management doesn’t understand the full impact that favoring company-owned stores over franchisees is having on its return on invested capital, revenues, and operating efficiencies.   

The Activist Shareholder: In engaging directly with the activist shareholder, we found this fellow shareholder shared several of our concerns.  We both agreed the company should be pursuing franchisee organizations over company-owned stores. We also both believed that company management does not exhibit enough urgency for change.  

The Board: We spoke with the Board in an Executive Session without company management present. That session confirmed for us that the Board does not fully understand challenges facing the company, either. One reason is that it lacks Directors with direct operating experience. The Board has recently proposed refreshment, possibly in reaction to the activist concerns, and also to receive a better recommendation from proxy advisor firms.

Outcomes

In the June 2017 proxy vote, we sided with the activist and supported all four dissident nominees. To our advantage, the vote succeeded.  

ESG Factors
ESG issue
          Customer account scandal and board oversight
        
Conducted by
Objectives

Objective: Better understand the findings of a Board-commissioned report surrounding the customer account scandal. 

Background:  In September 2016, the bank was fined by US regulators for opening thousands of fraudulent customer accounts. The scandal led to the departure of several key executives, including the CEO. A Board report on the issue identified a gross distortion of the bank’s sales culture and performance management system that created pressure on employees to sell unwanted products to customers and to open unauthorized accounts.   

Although the fraudulent practices apparently had been underway for years, it wasn’t until 2014 that sales practices were first identified to the Board. Throughout 2015 and 2016, the Board regularly engaged with company management on this issue. However, management did not accurately convey the full scope of the problem to the Board.  

In 2016, the Board began to address these issues directly, firing five senior executives, imposing forfeitures and clawbacks of compensation, eliminating sales goals, centralizing control functions, separating the roles of Chairman and the CEO, strengthening the charters of Board Committees, and establishing regular reporting to the Board by a new Office of Ethics.  

Scope and Process

We engaged with the bank and the Board multiple times in 2016 and 2017. While the issue initially arose in 2016, we did not get the opportunity to officially vote until May of 2017.  

We wanted to know if the former sales culture that stressed outperformance at all costs would need to be changed. During our engagement, the Board reiterated that cross-selling practices, which were the drivers of outperformance, were not the culprit in this situation and would continue.  The company stated that they would strengthen their internal culture, however, and prove that they can perform better.   

We wanted to understand the failure in Board oversight.  The Board said it was not deferential to management once the issue was identified, but stated that it did not get all information it needed from management early on when the incident was first identified. It should have centralized risk sooner.  In late 2015, the Board pushed to replace an executive partially responsible for the incident, but it didn't happen.  We noted that in 2016 this executive was allowed to retire without penalty.  

Outcomes

Overall, we concluded that Board oversight of the bank was dysfunctional, and that the replacement of all Board members who presided over the dysfunction was warranted.  

During the proxy vote of May 2017, we voted against all Board members who had been part of this bank’s Board prior to 2014. Since 2014, it appeared that the Board has focused on this issue and taken some positive action.

ESG Factors
ESG issue
          Executive compensation
        
Conducted by
Objectives

Objective: Better understand the company’s executive compensation arrangement. 

Background: This company operates both a cargo airline and passenger charter airline and leases aircraft to others. We have maintained a multiyear investment history in our Small and Mid-cap Value strategies.  

Our central concern ahead of this year’s proxy vote was a change-in-control agreement for the CEO that was triggered due to a partial acquisition.  This agreement does not require termination of employment for the executive to qualify for acceleration of equity pay. Instead, when a change-of-control occurs, all pay accelerates at 200% (max) performance.   

To us, this arrangement is poorly structured and resulted in an unnecessary payout. We do not like arrangements such as this one where an executive can receive a windfall payment but then continue in his or her day-to-day management role. The company will now possibly have to overpay the CEO this year, considering the CEO holds no equity now accordingly.  Additionally, the company paid bonuses to executives on a separate acquisition, which was also a poor practice. Such work is expected of senior executives and should be covered by their standard compensation. 

Scope and Process

We engaged with the CEO and Chairman of the Board to discuss their executive compensation practices ahead of the proxy vote at their annual meeting in May 2017. 

The company explained to us that this compensation agreement was a legacy agreement with the CEO that they have since changed. Specifically, the change in control agreement of the CEO now requires termination of employment for the executive to receive acceleration of pay. The company also explained that it has recently changed compensation consultants, brought on an executive compensation expert, and put a new member on the Board’s Compensation Committee.   

We were pleased to hear of these changes, but we told the company that we expect to see additional Compensation Committee refreshment, including the committee Chair. We specified that the Committee Chair should be a member whose tenure does not concur with the CEO’s tenure, as nearly all the current Committee's tenure does.  We believe this may be affecting the Committee's ability to challenge the CEO on compensation.

Outcomes

We voted against the compensation plan, the stock plan and the compensation committee chairman, citing the overall pay-for-performance disconnect and the lack of performance-based equity as the reasons for our vote.    

ESG Factors
ESG issue
          Executive Compensation
        
Conducted by
Objectives

Objective: Review executive compensation practices and board risk management processes.

Background: We are a top holder of this US company that distributes pharmaceuticals and provides health information technology, medical supplies, and care management tools, holding it in our Large Cap Value portfolios.  

The company is a large wholesaler of opioids in the US. We know that an estimated 2.5 million people in the US are addicted to these drugs. In 2015 alone, 15,000 US deaths were attributed to opioid overdose. There has been increasing regulatory and consumer pressure to hold companies associated with the drugs accountable for their misuse.   

This company has been the target of several lawsuits surrounding its distribution of opioids, with the central claims being that the company has ineffective control over monitoring suspicious orders by facilities that may be overprescribing opioids. The company reached a settlement agreement with the US government for violation of Controlled Substances Act. It paid a record settlement in January 2017 and had to suspend distribution from several major distributor facilities. It remains under investigation by several US States.

Scope and Process

We engaged the company ahead of the proxy vote at their upcoming annual meeting on two topics: 1) executive compensation, and 2) separate independent Board chairman.    

Executive Compensation: CEO compensation was outpacing performance, and we thought ROIC should be the lead metric, to more closely align executive compensation with shareholder value creation. The plan’s metrics also excluded legal settlements, but since those are a normal (and significant) part of this company’s business, they needed to be included.  

Board Composition and Oversight of Distribution: The company explained how it had overhauled oversight of its drug distribution monitoring system.  An enhanced monitoring process now includes several triggers of oversight and redundancy to alert possible fraudulent ordering activity, and a newly-created SVP role now oversees the program.  The company noted that it also has created a special Board Committee to review any additional claims made against it, including those by US states.  

It was unclear to us exactly where on the Board responsibility should rest for oversight of the distribution process.  The time commitment of the Board Chair was already extensive and could lead to a need for separate CEO/Chairman roles, given the complexity of the industry and issues. 

Outcomes

A fellow shareholder was running a “Vote No” campaign, urging shareholders to vote against Executive Compensation. Another shareholder filed a proposal to require an independent Board chairman. In both cases, the rationale was that the extensive legal, regulatory, and reputational risks connected to the opioid issue result in a need for more stringent Board oversight and compensation construction.   

Executive Compensation: We voted against the compensation plan and will continue to engage on this issue.  

Independent Board Chair: We did not see the need to require separation of the roles at this time, and voted against the proposal to do so. However, we will monitor closely and separation may be warranted in the future.    

ESG Factors
ESG issue
          Board composition, executive compensation construction, and other governance matters
        
Conducted by
Objectives

Objective: Obtain updates on this company’s Board composition, executive compensation construction, and other governance matters ahead of the proxy vote related to the annual general meeting.   

Background:  We hold this large Japanese electronics company in several of our International Value portfolios. We have continuously engaged this company on governance over the past several years. In 2017, the company made substantial progress on several issues which we had previously discussed. 

The historical issues included  Board of Directors independence and Board structure, and low overall return on equity. The company increased the level of independence of its Board and moved from a traditional two-tier statutory auditor construction to an Audit Committee structure. This is a positive change as it allows the Board greater ability to provide more broad level of oversight. It also  allows day-to-day operations without full Board approval.   

The company also improved their five-year average return on equity, which has been traditionally low for this company and this market. Last year, we had voted against the company president and board chairman due to the low average return on equity. In preparation for the annual 2017 proxy vote, we engaged with the company to determine whether these issues remained. 

Scope and Process

We met with the company in March of 2017.  

Executive Compensation: In comparison to Japanese standards, the company's disclosure on compensation is only slightly more transparent. The company’s major global peers often offer more transparency. While the company currently discloses some performance metrics, such as consolidated operating income, we recommended that the company also include return on equity in the plan. Japanese regulation now allows greater use of equity-based compensation for executives, so we expect the equity portion of the plan to grow. We expressed our desire for pre-set, disclosed performance metrics and goals for all portions of the plan. We want broader disclosure to properly assess how the compensation plan drives performance. 

Board Composition:  While the percentage of independent directors has increased, they are all tax accountants with likely similar perspectives. We told the company we expect greater diversity to be targeted in future Board refreshment, including the addition of a non-Japanese member, an increase in members with global business experience, and more gender diversity. There are currently no women on the Board, despite the fact that women comprise roughly 40% of the company's core customer base.

Outcomes

We voted in favor of all Board members but will continue to monitor the company's progress on return on equity levels, executive compensation disclosure, and Board composition.  If we do not see progress on these items we may begin to vote against the President and Chairman of the board.

24.2. Additional information. [Optional]


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