Vanguard WindsorTM Funds
Supplement Dated October 1, 2019, to the Statement of Additional Information Dated February 27, 2019
Effective October 1, 2019, the Vanguard’s Proxy Voting Guidelines section (revised to Proxy Voting) is replaced in its entirety with the following:
I. Proxy Voting Policies
Each Vanguard fund advised by Vanguard has retained proxy voting authority for each respective portfolio advised by Vanguard. The Board of Trustees of the Vanguard-advised funds (the Board) has adopted proxy voting procedures and guidelines to govern proxy voting for each portfolio retaining proxy voting authority, which are summarized in Appendix A. The Board of each Vanguard fund advised by a manager not affiliated with Vanguard has delegated the authority to vote proxies related to the portfolio securities held by each fund to its respective advisor(s). Each advisor will vote such proxies in accordance with its proxy voting policies and procedures, which are summarized in Appendix B.
II. Securities Lending
There may be occasions when Vanguard needs to restrict lending of and/or recall securities that are out on loan in order to vote in a shareholder meeting. For the funds managed by Vanguard, Vanguard has processes to monitor securities on loan and to evaluate any circumstances that may require it to restrict and/or attempt to recall the security based on the criteria set forth in Appendix A. Additionally, Vanguard has processes in place for advisors unaffiliated with Vanguard who have been delegated authority to vote proxies on behalf of certain Vanguard funds to inform Vanguard of an upcoming vote they deem to be material in accordance with such advisor’s proxy voting policies and procedures in order for Vanguard to instruct the recall of the security.
To obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30, log on to vanguard.com or visit the SEC’s website at www.sec.gov.
The following is added as Appendix A to this Statement of Additional Information:
Vanguard-Advised Funds Proxy Voting Policy
Each Vanguard fund advised by Vanguard retains proxy voting authority for each respective portfolio advised by Vanguard. The Board of Trustees (the Board) for the Vanguard-advised funds has adopted proxy voting procedures and guidelines to govern proxy voting for each portfolio retaining proxy voting authority.
The Investment Stewardship Oversight Committee (the Committee), made up of senior officers of Vanguard and subject to the procedures described below, oversees the Vanguard-advised funds proxy voting. The Committee reports directly to the Board. Vanguard is subject to these procedures and the proxy voting guidelines to the extent that they call for Vanguard to administer the voting process and implement the resulting voting decisions, and for these purposes the guidelines have also been approved by the Board of Directors of Vanguard.
The overarching objective in voting is simple: to support proposals and director nominees that maximize the value of each funds investmentsand those of fund shareholdersover the long term, consistent with the funds investment objective. Although the goal is simple, the proposals the funds receive are varied and frequently complex. As such, the voting principles and guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented. For more information on the funds proxy voting guidelines, please visit about.vanguard.com/investment-stewardship.
I. Investment Stewardship Team
The Investment Stewardship Team administers the day-to-day operation of the funds proxy voting process, overseen by the Committee. Although most votes will be determined, subject to the individual circumstances of each fund, by reference to the guidelines as separately adopted by each of the funds, there may be circumstances when the Investment Stewardship Team will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, at the Boards or the Committees discretion, such action is warranted. The Investment Stewardship Team performs the following functions: (1) managing and conducting due diligence of proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (5) voting proxies. The Investment Stewardship Team also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines.
II. Investment Stewardship Oversight Committee
The Board, including a majority of the independent trustees, appoints the members of the Committee who are senior officers of Vanguard. The Committee works with the Investment Stewardship Team to provide reports and other guidance to the Board regarding proxy voting by the funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness, and Vanguards Code of Ethics. There may be instances when the Committee is called upon to determine how to apply the proxy voting principles and guidelines in the best interest of each funds shareholders. The Board reviews the procedures and guidelines annually and modifies them from time to time in consultation with the Committee.
III. Proxy Voting Principles
Vanguards investment stewardship activities are grounded in four principles of good governance:
1) | Board composition: We believe good governance begins with a great board of directors. Our primary interest is to ensure that the individuals who represent the interests of all shareholders are independent, committed, capable, and appropriately experienced. |
2) | Oversight of strategy and risk: We believe that boards are responsible for effective oversight of a companys long-term strategy and any relevant and material risks. |
3) | Executive compensation: We believe that performance-linked compensation (or remuneration) policies and practices are fundamental drivers of sustainable, long-term value. |
4) | Governance structures: We believe that companies should have in place governance structures to ensure that boards and management serve in the best interests of the shareholders they represent. |
IV. Evaluation of Proxies
For ease of reference, the procedures and guidelines often refer to all funds. However, the processes and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In other cases, however, a fund may vote differently, depending upon the nature and objective of the fund, the composition of its portfolio, and other factors.
The guidelines do not permit the Board to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors that should be considered in each voting decision. A fund may refrain from voting some or all of its shares or vote in a particular way if doing so would be in the funds and its shareholders best interests. These circumstances may arise, for example, if the expected cost of voting exceeds the expected benefits of voting, if exercising the vote would result in the imposition of trading or other restrictions, or if a fund (or all Vanguard funds in the aggregate) were to own more than the permissible maximum percentage of a companys stock (as determined by the companys governing documents or by applicable law, regulation, or regulatory agreement).
In evaluating proxy proposals, we consider information from many sources, including, but not limited to, an investment advisor unaffiliated with Vanguard that has investment and proxy voting authority with respect to Vanguard funds that hold shares in the applicable company, the management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the companys board, absent guidelines or other specific facts that would support a vote against management. The Investment Stewardship Team does not vote in lockstep with recommendations from proxy advisors (such as Institutional Shareholder Services or Glass Lewis) for voting on behalf of the Vanguard funds. Data from proxy advisors serve as one of many inputs into our research process.
While serving as a framework, the guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Investment Stewardship Team, under the supervision of the Committee, will evaluate the issue and cast the funds vote in a manner that, in their view, will maximize the value of the funds investment, subject to the individual circumstances of the fund.
V. Conflicts of Interest
Vanguard takes seriously its commitment to avoid potential conflicts of interest. Vanguard funds invest in thousands of publicly listed companies worldwide. Those companies may include clients, potential clients, vendors, or competitors. Some companies may employ Vanguard trustees, former Vanguard executives, or family members of Vanguard personnel who have direct involvement in Vanguards Investment Stewardship program.
Vanguards approach to mitigating conflicts of interest begins with the funds proxy voting procedures. The procedures require that voting personnel act as fiduciaries, and must conduct their activities at all times in accordance with the following standards: (i) Fund shareholders interests come first; (ii) conflicts of interest must be avoided; (iii) and compromising situations must be avoided.
We maintain an important separation between Vanguards Investment Stewardship Team and other groups within Vanguard that are responsible for sales, marketing, client service, and vendor/partner
relationships. Proxy voting personnel are required to disclose potential conflicts of interest, and must recuse themselves from all voting decisions and engagement activities in such instances. In certain circumstances, Vanguard may refrain from voting shares of a company, or may engage an independent third-party fiduciary to vote proxies.
Each externally managed fund has adopted the proxy voting guidelines of its advisor(s) and votes in accordance with the external advisors guidelines and procedures. Each advisor has its own procedures for managing conflicts of interest in the best interests of fund shareholders.
VI. Environmental and Social Proposals
Proposals in this category, initiated primarily by shareholders, typically request that a company enhance its disclosure or amend certain business practices. The funds will evaluate these resolutions in the context of our view that a companys board has ultimate responsibility for providing effective ongoing oversight of relevant sector- and company-specific risks, including those related to environmental and social matters. The funds will evaluate each proposal on its merits and support those where we believe there is a logically demonstrable linkage between the specific proposal and long-term shareholder value of the company. Some of the factors considered when evaluating these proposals include the materiality of the issue, the quality of the current disclosures/business practices, and any progress by the company toward the adoption of best practices and/or industry norms.
VII. Voting in Markets Outside the United States
Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. Each funds votes will be used, where applicable, to advocate for improvements in governance and disclosure by each funds portfolio companies. We will evaluate issues presented to shareholders for each funds foreign holdings in the context with the principles described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with the principles, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below.
Many other markets require that securities be blocked or reregistered to vote at a companys meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements.
The costs of voting (e.g., custodian fees, vote agency fees) in other markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances in which the issues presented are unlikely to have a material impact on shareholder value.
VIII. Voting Shares of a Company That Has an Ownership Limitation
Certain companies have provisions in their governing documents that restrict stock ownership in excess of a specified limit. Typically, these ownership restrictions are included in the governing documents of real estate investment trusts, but may be included in other companies governing documents. A companys governing documents normally allow the company to grant a waiver of these ownership limits, which would allow a fund to exceed the stated ownership limit. Sometimes a company will grant a waiver without restriction. From time to time, a company may grant a waiver only if a fund (or funds) agrees to not vote the companys shares in excess of the normal specified limit. In such a circumstance, a fund may refrain from voting shares if owning the shares beyond the companys specified limit is in the best interests of the fund and its shareholders. In addition, applicable law may require prior regulatory approval to permit ownership of certain regulated issuers voting securities above certain limits or may impose other restrictions on owners of more than a certain percentage of a regulated issuers voting shares. The
Board has authorized the funds to vote shares above these limits in the same proportion as votes cast by the issuers entire shareholder base (i.e., mirror vote) or to refrain from voting excess shares if mirror voting is not practicable. Further, the Board has adopted policies that will result in certain funds mirror voting a higher proportion of the shares they own in a regulated issuer in order to permit certain other funds (generally advised by managers not affiliated with Vanguard) to mirror vote none, or a lower proportion of, their shares in such regulated issuer.
IX. Voting on a Funds Holdings of Other Vanguard Funds
Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund.
X. Securities Lending
There may be occasions when Vanguard needs to restrict lending of and/or recall securities that are out on loan in order to vote in a shareholder meeting. Vanguard has processes to monitor securities on loan and to evaluate any circumstances that may require us to restrict and/or recall the stock. In making this decision, we consider:
The following is added as Appendix B to this Statement of Additional Information:
Barrow, Hanley Proxy Voting Policies and Procedures
Barrow, Hanley, Mewhinney & Strauss (BHMS) has the responsibility to vote proxies for equity securities for its clients who have delegated this responsibility to us, and under BHMSs fiduciary duty, the Firms policy is to vote our clients proxies in the best economic interests of our clients, the beneficial owners of the shares. BHMS has adopted this Proxy Voting Policy, and maintains written procedures for the handling of research, voting, and reporting of the proxy votes, and making appropriate disclosures about proxy voting on behalf of our clients. Disclosure information about the Firms Proxy Voting is included in BHMS Form ADV Part 2.
To assist in the proxy voting process, BHMS retains the services of Glass Lewis & Co. Glass Lewis provides:
Proxy Oversight Committee, Proxy Coordinators, and Proxy Voting Committee
· | BHMSs Proxy Oversight Committee is responsible for implementing and monitoring BHMS | |
proxy voting policy, procedures, disclosures and recordkeeping, including outlining our | ||
voting guidelines in our procedures. The Proxy Oversight Committee conducts periodic | ||
reviews to monitor and ensure that the Firms policy is observed, implemented properly, and | ||
amended or updated, as appropriate. The Proxy Oversight Committee is made up of the | ||
CCO/CRO, the Responsible Investing Committee lead, the director of investment | ||
operations, the ESG research coordinator, and an at-large portfolio manager. | ||
· | BHMSs proxy coordinators review and organize the data and recommendations provided | |
by the proxy service. The proxy coordinators are responsible for ensuring that the proxy | ||
ballots are routed to the appropriate research analyst based on industry sector coverage. | ||
Proxy coordinators are assigned from the equity operations department. | ||
· | BHMSs research analysts review and evaluate proxy proposals and make written | |
recommendations to the Proxy Voting Committee to ensure that votes are consistent with | ||
the Firms analysis and are in the best interest of the shareholders, our clients. | ||
· | BHMSs equity portfolio managers are members of the Proxy Voting Committee. Equity | |
portfolio managers vote proxy proposals based on share ownership after giving | ||
consideration to BHMSs Proxy Voting Guidelines, internal research recommendations, and | ||
the opinion of Glass Lewis. Proxy votes must be approved by the Proxy Voting Committee | ||
before submitting to the proxy service provider. | ||
· | Voting proxies for the Diversified Small Cap Value and Diversified Small/Mid Cap Value | |
accounts is done in accordance with the proxy service providers recommendations for the | ||
following reasons: | ||
o | Investments are based on a quantitative model. Fundamental research is not | |
performed for the holdings. | ||
o | The holding period is too short to justify the time for analysis to vote. |
Conflicts of Interest
· | Potential conflicts may arise when BHMS invests in equity securities of corporations that are | |
also clients of the Firm. BHMS seeks to mitigate potential conflicts by: | ||
o | Making voting decisions for the benefit of the shareholder(s), our clients; | |
o | Uniformly voting every proxy based on BHMS internal research and | |
consideration of Glass Lewis recommendations; and | ||
o | Documenting the votes of companies who are also clients of the Firm. | |
· | If a material conflict of interest exists, members from the Proxy Voting and Oversight | |
Committees will determine if the clients should have an opportunity to vote their proxies | ||
themselves, or to address the voting issue through other objective means, such as voting in | ||
a manner consistent with a predetermined voting policy or accepting the voting | ||
recommendation of Glass Lewis. |
Other Policies and Procedures
· BHMS sends a daily electronic transfer of equity positions to the proxy service provider.
· The proxy service provider identifies accounts eligible to vote for each security and posts
the proposals and research on its secure, proprietary online system. | ||
· | BHMS sends a proxy report to clients at least annually (or as requested by client), listing the | |
number of shares voted and disclosing how proxies were voted. | ||
· | Voting records are retained on the network, which is backed up daily. The proxy service | |
provider retains records for seven years. | ||
· | BHMSs Proxy Voting Guidelines are available upon request by calling: (214) 665-1900, or | |
by e-mailing: clientservices@barrowhanley.com. | ||
· | The proxy coordinators retain the following proxy records for at least seven years: | |
o | These policies and procedures and any amendments; | |
o | Proxy statements received regarding our clients securities; | |
o | A record of each proxy we voted; | |
o | Proxy voting reports that are sent to clients annually; | |
o | Any document BHMS created that was material to making a decision on how to vote | |
proxies, or that memorializes that decision; and | ||
o | Records of any clients request for proxy voting information. |
Hotchkis and Wiley (H&W) Proxy Voting Policies and Procedures
Generally, and except to the extent that a client otherwise instructs H&W in writing, H&W will vote or abstain from voting (by proxy or otherwise) on all matters for which a shareholder vote is solicited by, or with respect to, issuers of securities beneficially held in client accounts in such manner as H&W deems appropriate in accordance with its written policies and procedures. These policies and procedures set forth guidelines for voting typical proxy proposals. However, each proxy issue will be considered individually in order that H&W may consider what would be in its clients best interest. In the event that any proxies raise a conflict of interest, a member of the Proxy Oversight Committee will review H&Ws proposed votes to ensure that they are consistent with established guidelines and not prompted by any conflict of interest.
H&W may determine not to vote proxies in respect of securities of any issuer (i) if H&W determines that it would be in the clients overall best interest not to vote under the circumstances, such as when (a) the cost of voting exceeds the expected benefit to the client, (b) voting the clients proxies will not have an effect on the outcome of the matter up for vote or (c) the matter up for vote will not impact the clients economic interests; (ii) if H&W does not receive adequate information from the clients custodian or proxy vendor in sufficient time to cast the vote; or (iii) if the security is no longer held in the clients portfolios by the proxy meeting date. For example, to the extent that H&W receives proxies for securities that are transferred into a clients portfolio that were not recommended or selected by H&W and have been sold or are expected to be sold promptly in an orderly manner (legacy securities), H&W will generally refrain from voting such proxies. In such circumstances, since legacy securities have been sold or are expected to be sold promptly, H&W may determine that voting proxies on such securities would not further a clients interest in maximizing the value of its investments. H&W will consider a clients special request to vote a legacy security proxy, and if agreed would vote such proxy in accordance with H&Ws guidelines.
Non-U.S. proxies (and particularly those in emerging markets) may involve a number of restrictions preventing H&Ws ability to vote. H&W will vote such proxies to the extent it is feasible to do so.
Certain client accounts may purchase unsponsored American Depositary Receipts (ADRs) where shareholder benefits and voting rights may not be extended to the holders of these particular securities.
Fixed-income securities normally do not provide voting rights; however, special circumstances may occur that permit voting or responding to another type of corporate action.
Certain clients have specifically elected to retain the responsibility for receiving and voting proxies for securities maintained in their portfolios and receive their proxies or other solicitations directly from their custodian. H&W will not vote the proxies for these securities in this case, but may provide advice to clients regarding the clients voting of proxies.
If H&W has the authority to exercise proxy voting rights for a client account, H&W will vote, or abstain from voting, the proxies for securities beneficially held by the custodian for the portfolio as of the record date of the shareholder meetings (settlement date). Securities not held by the custodian as of the record date (e.g., due to an unsettled purchase or securities lending) will not be voted by H&W. Employees of H&W may own the same securities held by client accounts. The employees vote their securities independently from H&Ws proxy voting policy.
H&W utilizes a third-party service provider to provide administrative assistance in connection with the voting of proxies, including certain record keeping and reporting functions.
A client may obtain a copy of H&W's proxy voting policies and procedures and/or information on how H&W has voted the client's securities free of charge by written request to hwclient@hwcm.com.
Lazard Proxy Voting Policies and Procedures
Introduction
Lazard Asset Management LLC (Lazard) is a global investment firm that provides investment management services for a variety of clients. As a registered investment advisor, Lazard has a fiduciary obligation to vote proxies in the best interests of our clients. Lazards Proxy Voting Policy has been developed with the goal of maximizing the long term shareholder value.
Lazard does not delegate voting authority to any proxy advisory service, but rather retains complete authority for voting all proxies delegated to it. Our policy is generally to vote all meetings and all proposals; and generally to vote all proxies for a given proposal the same way for all clients. The Policy is also designed to address potential material conflicts of interest associated with proxy voting, and does so principally in setting approved guidelines for various common proposals.
Proxy Operations Department
Lazards proxy voting process is administered by members of its Operations Department (Proxy Administration Team). Oversight of the process is provided by Lazards Legal/Compliance Department and Lazards Proxy Committee (Proxy Committee).
Proxy Committee
Lazards Proxy Committee is comprised of senior investment professionals, members of the Legal/Compliance Department and other Lazard personnel. The Proxy Committee meets regularly, generally on a quarterly basis, to review this Policy and other matters relating to the firms proxy voting functions. Meetings may be convened more frequently (for example, to discuss a specific proxy voting proposal) as needed.
Role of Third Parties
Lazard currently subscribes to advisory and other proxy voting services provided by Institutional Shareholder Services, Inc. (ISS) and by Glass, Lewis & Co. (Glass Lewis). These proxy advisory services provide independent analysis and recommendations regarding various companies proxy proposals. While this research serves to help improve our understanding of the issues surrounding a companys
proxy proposals, Lazards investment professionals are ultimately responsible for providing the vote recommendation for a given non-routine proposal. Voting for each agenda of each meeting is instructed specifically by Lazard in accordance with the Policy. ISS also provides administrative services related to proxy voting such as a web-based platform for proxy voting, ballot processing, recordkeeping and reporting.
Voting Process
Lazard votes on behalf of our clients according to proxy voting guidelines approved by the Proxy Committee (Approved Guidelines). The Approved Guidelines determine whether a specific agenda item should be voted For, Against, or is to be considered on a case-by case basis. The Proxy Administration Team ensures that investment professionals responsible for proxy voting are aware of the Approved Guidelines for each proposal. Voting on a proposal in a manner that is inconsistent with an Approved Guideline requires the approval of the Proxy Committee.
With respect to proposals to be voted on a case-by-case basis, the Proxy Administration Team will consult with relevant investment professionals prior to determining how to vote on a proposal. Lazard generally will treat proxy votes and voting intentions as confidential in the period before votes have been cast, and for appropriate time periods thereafter.
Conflicts of Interest
Meetings that pose a potential material conflict of interest for Lazard are voted in accordance with Approved Guidelines. Where the Approved Guideline is to vote on a case-by-case basis, Lazard will vote in accordance with the majority recommendation of the independent proxy services. Potential material conflicts of interest include: Lazard manages the companys pension plan; The proponent of a shareholder proposal is a Lazard client; An employee of Lazard (or an affiliate) sits on a companys board of directors; An affiliate of Lazard serves as financial advisor or provides other services to the company; or A Lazard employee has a material relationship with the company.
Conflict Meetings are voted in accordance with the Lazard Approved Guidelines. In situations where the Approved Guideline is to vote case-by-case and a material conflict of interest appears to exist, Lazards policy is to vote the proxy item according to the majority recommendation of the independent proxy services to which we subscribe.
Voting Exceptions
It is Lazards intention to vote all proposals at every meeting. However, there are instances when voting is not practical or is not, in our view, in the best interests of our clients. Lazard does not generally vote proxies for securities loaned by clients through a custodians stock lending program.
Environmental, Social and Corporate Governance
Lazard has an Environmental, Social and Corporate Governance (ESG) Policy, which outlines our approach to ESG and how our investment professionals take ESG issues into account as a part of the investment process. We recognize that ESG issues can affect the valuation of the companies that we invest in on our clients behalf. As a result, we take these factors into consideration when voting, and, consistent with our fiduciary duty, vote proposals in a way we believe will increase shareholder value.
Pzena Investment Management, LLC
Proxy Voting, Corporate Actions, & Class Actions
INTRODUCTION
As a registered investment adviser, Pzena Investment Management, LLC (PIM or the Firm) is required to adopt policies and procedures reasonably designed to (i) ensure that proxies are voted in the best interests of clients, (ii) disclose to clients information about these policies and procedures and how clients can obtain information about their proxies, and (iii) describe how conflicts of interest are addressed. The following policies and procedures have been established to ensure decision making consistent with PIMs fiduciary responsibilities and applicable regulations under the Investment Company Act and Advisers Act. These policies, procedures and guidelines are meant to convey PIMs general approach to certain issues. Nevertheless, PIM reviews all proxies individually and makes final decisions based on the merits of each issue.
I. | PROXY VOTING PROCEDURES A. ISS |
PIM subscribes to a proxy monitor and voting agent service offered by Institutional Shareholder Services (ISS). Under the written agreement between ISS and PIM, ISS provides a proxy analysis with research and a vote recommendation for each shareholder meeting of the companies in our separately managed client accounts. They also vote, record and generate a voting activity report for our clients. PIM retains responsibility for instructing ISS how to vote, and we still apply our own guidelines as set forth herein when voting. If PIM does not issue instructions for a particular vote, the default is for ISS to mark the ballots in accordance with these guidelines (when they specifically cover the item being voted on), and to refer all other items back to PIM for instruction (when there is no PIM policy covering the vote).
PIM personnel continue to be responsible for entering all relevant client and account information (e.g., changes in client identities and portfolio holdings) in the Indata system. A direct link download has been established between PIM and ISS providing data from the Indata System. ISS assists us with our recordkeeping functions, as well as the mechanics of voting. As part of ISS recordkeeping/administrative function, they receive and review all proxy ballots and other materials, and generate reports regarding proxy activity during specified periods, as requested by us. To the extent that the Procedures set forth in Section I are carried out by ISS, PIM will periodically monitor ISS to ensure that the Procedures are being followed and will conduct random tests to verify that proper records are being created and retained as provided in Section 6 below.
B. COMPLIANCE PROCEDURES
PIMs standard Investment Advisory Agreement provides that until notified by the client to the contrary, PIM shall have the right to vote all proxies for securities held in that clients account. In those instances where PIM does not have proxy voting responsibility, it shall forward to the client or to such other person as the client designates any proxy materials received by it. In all instances where PIM has voting responsibility on behalf of a client, it follows the procedures set forth below. The Director of Research is responsible for monitoring the PIM Analysts compliance with such procedures when voting. The Chief Compliance Officer (CCO) is responsible for monitoring overall compliance with these procedures and an internally-designated Proxy Coordinator is responsible for day-to-day proxy voting activities as described below.
C. | VOTING PROCEDURES |
1. DETERMINE PROXIES TO BE VOTED
Based on the information provided by PIM via the direct link download established between PIM and ISS mentioned above, ISS shall determine what proxy votes are outstanding and what issues are to be voted on for all client accounts. Proxies received by ISS will be matched against PIMs records to verify that each proxy has been received. If a discrepancy is discovered, ISS will use reasonable efforts to resolve it, including calling PIM and/or applicable Custodians. Pending votes will be forwarded first to the Firms CCO, or designee, who will perform the conflicts checks described in Section 2 below. Once the conflicts checks are completed, the ballots and supporting proxy materials will be returned to the Proxy Coordinator who will forward them on to the Analyst who is responsible for the Company soliciting the proxy. Specifically, the Analyst will receive a folder containing the proxy statement, the proxy analysis by ISS, a blank disclosure of personal holdings form, and one or more vote record forms.* The Analyst will then mark his/her voting decision on the vote record form, initial this form to verify his/her voting instructions, fill out the disclosure of personal holdings form, and return the folder to the Proxy Coordinator who will then enter the vote into the ISS System. Any notes or other materials prepared or used by the Analyst in making his/her voting decision shall also be filed in the folder.
If an Analyst desires to vote contrary to the guidelines set forth in this proxy voting policy or the written proxy voting policy designated by a specific client, the Analyst will discuss the vote with the Chief Investment Officers and/or Director of Research and the Chief Investment Officers and/or Director of Research shall determine how to vote the proxy based on the Analysts recommendation and the long term economic impact such vote will have on the securities held in client accounts. If the Chief Investment Officers and/or Director of Research agree with the Analysts recommendation and determine that a contrary vote is advisable the Analyst will provide written documentation of the reasons for the vote (by putting such documentation in the folder and/or e-mailing such documentation to the Proxy Coordinator and CCO for filing.) When the Analyst has completed all voting, the Analyst will return the folder to the Proxy Coordinator who will enter the votes in the ISS System.
* A separate ballot and vote record form may be included in the folder if the company soliciting the proxy is included in the portfolio of a client who has designated specific voting guidelines in writing to PIM which vary substantially from these policies and if the Custodian for that client does not aggregate ballots before sending them to ISS. In such event, the Analyst shall evaluate and vote such ballot on an individual basis in accordance with the applicable voting guidelines.
2. | IDENTIFY CONFLICTS AND VOTE ACCORDING TO SPECIAL CONFLICT | |
RESOLUTION RULES | ||
The primary consideration is that PIM act for the benefit of its clients and places its | ||
clients interests before the interests of the Firm and its principals and employees. The | ||
following provisions identify potential conflicts of interest that are relevant to and most | ||
likely to arise with respect to PIMs advisory business and its clients, and set forth how | ||
we will resolve those conflicts. In the event that the Analyst who is responsible for the | ||
Company soliciting a particular proxy has knowledge of any facts or circumstances | ||
which the Analyst believes are or may appear be a material conflict, the Analyst will | ||
advise PIMs CCO, who will convene a meeting of the proxy committee to determine | ||
whether a conflict exists and how that conflict should be resolved. | ||
a. | PIM has identified the following areas of potential concern: | |
Where PIM manages any pension or other assets affiliated with a | ||
publicly traded company, and also holds that companys or an |
affiliated companys securities in one or more client portfolios. | ||
| Where PIM manages the assets of a proponent of a shareholder | |
proposal for a company whose securities are in one or more client | ||
portfolios. | ||
| Where PIM has a client relationship with an individual who is a | |
corporate director, or a candidate for a corporate directorship of a | ||
public company whose securities are in one or more client portfolios. | ||
| Where a PIM officer, director or employee, or an immediate family | |
member thereof is a corporate director, or a candidate for a | ||
corporate directorship of a public company whose securities are in | ||
one or more client portfolios. For purposes hereof, an immediate | ||
family member shall be a spouse, child, parent, or sibling. | ||
b. | To address the first potential conflict identified above, PIMs CCO, or | |
designee, will maintain a list of public company clients that will be updated | ||
regularly as new client relationships are established with the Firm. Upon | ||
receipt of each proxy to be voted for clients, the Proxy Coordinator will give | ||
the ballot and supporting proxy materials to PIMs CCO, or designee, who will | ||
check to see if the company soliciting the proxy is also on the public company | ||
client list. If the company soliciting the vote is on our public company client list | ||
and PIM still manages pension or other assets of that company, the CCO, or | ||
designee, will note this in the folder so that PIM will vote the proxy in | ||
accordance with the special rules set forth in Subsection f of this Section 2. | ||
c. | To address the second potential conflict identified above, PIMs CCO, or | |
designee, will check the proxy materials to see if the proponent of any | ||
shareholder proposal is one of PIMs clients. If the proponent of a | ||
shareholder proposal is a PIM client, the CCO, or designee, will note this in | ||
the folder so that PIM will vote the proxy in accordance with the special rules | ||
set forth in Subsection f of this Section 2. | ||
d. | To address the third potential conflict identified above, PIMs CCO, or | |
designee, will check the proxy materials to see if any corporate director, or | ||
candidate for a corporate directorship of a public company whose securities | ||
are in one or more client portfolios is one of PIMs individual clients (based | ||
on the client list generated by our Portfolio Management System, Indata). | ||
For purposes of this check, individual clients shall include natural persons | ||
and testamentary or other living trusts bearing the name of the grantor, | ||
settlor, or beneficiary thereof. If a director or director nominee is a PIM client, | ||
the CCO, or designee, will note this in the folder so that PIM will vote the | ||
proxy in accordance with the special rules set forth in Subsection f of this | ||
Section 2. | ||
e. | To address the fourth potential conflict identified above, PIMs CCO, or | |
designee, will check the proxy materials to see if any corporate director, or | ||
candidate for a corporate directorship of a public company whose securities | ||
are in one or more client portfolios is a PIM officer, director or employee or an | ||
immediate family member thereof (based on the written responses of PIM | ||
personnel to an annual questionnaire in this regard). If a director or director | ||
nominee is a PIM officer, director or employee or an immediate family member | ||
thereof, the CCO, or designee, will note this in the folder so that PIM will vote | ||
the proxy in accordance with the special rules set forth in Subsection f of this | ||
Section 2. | ||
f. | The following special rules shall apply when a conflict is noted in the folder: |
i. | In all cases where PIM manages the pension or other assets of a publicly traded company, and also holds that companys or an affiliated companys securities in one or more client portfolios, PIM will have no discretion to vote any portion of the proxy, but will defer to the recommendation(s) of ISS in connection therewith and will vote strictly according to those recommendations. |
ii. | The identity of the proponent of a shareholder proposal shall not be given any substantive weight (either positive or negative) and shall |
not otherwise influence an Analysts determination whether a vote |
for or against a proposal is in the best interests of PIMs clients. |
iii. | If PIM has proxy voting authority for a client who is the proponent of a shareholder proposal and PIM determines that it is in the best interests of its clients to vote against that proposal, a designated member of PIMs client service team will notify the client-proponent and give that client the option to direct PIM in writing to vote the clients proxy differently than it is voting the proxies of its other clients. |
iv. | If the proponent of a shareholder proposal is a PIM client whose assets under management with PIM constitute 30% or more of PIMs total assets under management, and PIM has determined that it is in |
the best interests of its clients to vote for that proposal, PIM will disclose its intention to vote for such proposal to each additional client who also holds the securities of the company soliciting the vote on such proposal and for whom PIM has authority to vote proxies. If a client does not object to the vote within 3 business days of delivery of such disclosure, PIM will be free to vote such clients proxy as stated in such disclosure.
v. | In all cases where PIM manages assets of an individual client and that client is a corporate director, or candidate for a corporate directorship of a public company whose securities are in one or more client portfolios, PIM will have no discretion to vote any portion of the proxy, but will defer to the recommendation(s) of ISS in connection therewith and will vote strictly according to those recommendations. |
vi. | In all cases where a PIM officer, director or employee, or an immediate family member thereof is a corporate director, or a candidate for a corporate directorship of a public company whose securities are in one or more client portfolios, PIM will have no discretion to vote any portion of the proxy, but will defer to the recommendation(s) of ISS in connection therewith and will vote strictly according to those recommendations. |
Notwithstanding any of the above special rules to the contrary, in the extraordinary event that it is determined by unanimous vote of the Director of Research, the Chief Executive Officer, and the Analyst covering a particular company that the ISS recommendation on a particular proposal to be voted is materially adverse to the best interests of the clients, then in that event, the following alternative conflict resolution procedures will be followed:
A designated member of PIMs client service team will notify each client who holds the securities of the company soliciting the vote on such proposal, and for whom PIM has authority to vote proxies, and disclose all of the facts pertaining to the vote (including, PIMs conflict of interest, the ISS recommendation, and PIMs recommendation). The client then will be asked to direct PIM how to vote on the issue. If a client does not give any direction to PIM within 3 business days of delivery of such
disclosure, PIM will be free to vote such clients proxy in the manner it deems to be in the best interest of the client.
PIM will always defer to ISS when it votes a proxy of company shares accepted as a client accommodation, where said shares will not be held as part of the managed portfolio.
On an annual basis, the Compliance Department also will review the conflicts policies and Code of Conduct that ISS posts on its website.
3. VOTE
Each proxy that comes to PIM to be voted shall be evaluated on the basis of what is in the best interest of the clients. We deem the best interests of the clients to be that which maximizes shareholder value and yields the best economic results (e.g., higher stock prices, long-term financial health, and stability). In evaluating proxy issues, PIM will rely on ISS to identify and flag factual issues of relevance and importance. We also will use information gathered as a result of the in-depth research and on-going company analyses performed by our investment team in making buy, sell and hold decisions for our client portfolios. This process includes periodic meetings with senior management of portfolio companies. PIM may also consider information from other sources, including the management of a company presenting a proposal, shareholder groups, and other independent proxy research services. Where applicable, PIM also will consider any specific guidelines designated in writing by a client.
The Analyst who is responsible for following the company votes the proxies for that company. If such Analyst also beneficially owns shares of the company in his/her personal trading accounts, the Analyst must complete a special Disclosure of Personal Holdings Form and the Director of Research must sign off on the Analysts votes for that company by initialing such special form before it and the vote record sheet are returned to the Proxy Coordinator. It is the responsibility of each Analyst to disclose such personal interest and obtain such initials. Any other owner, partner, officer, director, or employee of the Firm who has a personal or financial interest in the outcome of the vote is hereby prohibited from attempting to influence the proxy voting decision of PIM personnel responsible for voting client securities.
Unless a particular proposal or the particular circumstances of a company may otherwise require (in the case of the conflicts identified in Section 2 above) or suggest (in all other cases), proposals generally shall be voted in accordance with the following broad guidelines:
a. | Support management recommendations for the election of directors and appointment of auditors (subject to j below). | ||
b. | Give management the tools to motivate employees through reasonable incentive programs. Within these general parameters, PIM generally will support plans under which 50% or more of the shares awarded to top executives are tied to performance goals. In addition, the following are conditions that would generally cause us to vote against a management incentive arrangement: | ||
i. | With respect to incentive option arrangements: | ||
The proposed plan is in excess of 10% of shares, or | |||
The company has issued 3% or more of outstanding shares in a single year in the recent past, or | |||
The new plan replaces an existing plan before the existing plan's termination date (i.e., they ran out of authorization) and some other terms of the new plan are likely to be adverse to the maximization of |
investment returns, or | ||
| The proposed plan resets options, or similarly compensates | |
executives, for declines in a companys stock price. This includes | ||
circumstances where a plan calls for exchanging a lower number of | ||
options with lower strike prices for an existing larger volume of | ||
options with high strike prices, even when the option valuations | ||
might be considered the same total value. However, this would not | ||
include instances where such a plan seeks to retain key executives | ||
who have been undercompensated in the past. | ||
For purposes hereof, the methodology used to calculate the share | ||
threshold in (i) above shall be the (sum of A + B) divided by (the | ||
sum of A + B + C + D), where: A = the number of shares reserved | ||
under the new plan/amendment; B = the number of shares | ||
available under continuing plans; C = granted but unexercised | ||
shares under all plans; and D = shares outstanding, plus | ||
convertible debt, convertible equity, and warrants. | ||
ii. | With respect to severance, golden parachute or other incentive | |
compensation arrangements: | ||
| The proposed arrangement is excessive or not reasonable in light of | |
similar arrangements for other executives in the company or in the | ||
companys industry (based solely on information about those | ||
arrangements which may be found in the companys public | ||
disclosures and in ISS reports); or | ||
| The proposed parachute or severance arrangement is considerably | |
more financially or economically attractive than continued | ||
employment. Although PIM will apply a CASE-BY-CASE analysis of | ||
this issue, as a general rule, a proposed severance arrangement | ||
which is 3 or more times greater than the affected executives then | ||
current compensation shall be voted against unless such | ||
arrangement has been or will be submitted to a vote of shareholders | ||
for ratification; or | ||
| The triggering mechanism in the proposed arrangement is | |
solely within the recipients control (e.g., resignation). |
c. | PIM prefers a shareholder vote on compensation plans in order to provide a | |
mechanism to register discontent with pay plans. In general, PIM will support | ||
proposals to have non- binding shareholder votes on compensation plans so | ||
long as these proposals are worded in a generic manner that is unrestrictive to | ||
actual company plans. However, PIM may oppose these proposals if PIM | ||
deems that the proposal: | ||
i. | restricts the companys ability to hire new, suitable management, or | |
ii. | restricts an otherwise responsible management team in some other | |
way harmful to the company. | ||
d. | Support facilitation of financings, acquisitions, stock splits, and increases | |
in shares of capital stock that do not discourage acquisition of the | ||
company soliciting the proxy. |
e. | Consider each environmental, social or corporate governance (ESG) proposal | ||
its own merits. | |||
f. | Support anti-takeover measures that are in the best interest of the | ||
but oppose poison pills and other anti-takeover measures that | |||
management and/or thwart the maximization of investment returns. | |||
g. | Oppose classified boards and any other proposals designed to | ||
or restrict shareholders rights. | |||
h. | Oppose proposals requiring super majority votes for business combinations | ||
the particular proposal or the particular circumstances of the affected | |||
suggest that such a proposal would be in the best interest of the | |||
i. | Oppose vague, overly broad, open-ended, or general other business | ||
for which insufficient detail or explanation is provided or risks or | |||
of a vote in favor cannot be ascertained. | |||
j. | Make sure management is complying with current requirements such as of | ||
NYSE, NASDAQ and Sarbanes-Oxley Act of 2002 focusing on auditor | |||
and improved board and committee representation. Within | |||
general parameters, the opinions and recommendations of ISS will | |||
thoroughly evaluated and the following guidelines will be considered: | |||
PIM generally will vote against auditors and withhold votes from Audit | |||
members if non-audit (other) fees are greater than the | |||
of audit fees + audit- related fees + permissible tax fees. | |||
applying the above fee formula, PIM will use the following definitions: | |||
Audit fees shall mean fees for statutory audits, comfort letters, attest services, consents, and review of filings with SEC | |||
Audit-related fees shall mean fees for employee benefit plan audits, due diligence related to M&A, audits in connection with acquisitions, internal control reviews, consultation on financial accounting and reporting standards | |||
Tax fees shall mean fees for tax compliance (tax returns, claims for refunds and tax payment planning) and tax consultation and planning (assistance with tax audits and appeals, tax advice relating to M&A, employee benefit plans and requests for rulings or technical advice from taxing authorities) | |||
PIM will apply a CASE-BY-CASE approach to shareholder proposals | |||
companies to prohibit their auditors from engaging in non-audit | |||
(or capping the level of non-audit services), taking into account | |||
the non-audit fees are excessive (per the formula above) and | |||
the company has policies and procedures in place to limit non- | |||
services or otherwise prevent conflicts of interest. | |||
PIM generally will evaluate director nominees individually and as a | |||
based on ISS opinions and recommendations as well as our |
personal assessment of record and reputation, business knowledge and background, shareholder value mindedness, accessibility, corporate governance abilities, time commitment, attention and awareness, independence, and character. | ||
PIM generally will withhold votes from any insiders flagged by ISS on audit compensation or nominating committees, and from any insiders and affiliated outsiders flagged by ISS on boards that are not at least majority independent. | ||
In general, PIM will not support shareholder proposals to vote against directors unless PIM determines that clear shareholder value destruction has occurred as a consequence of the directors actions. When shareholders propose voting against directors serving on compensation committees, PIM will evaluate ISS opinions and recommendations, but will vote on the issue based on PIMs assessment of the matter and independently of ISS criteria. | ||
PIM will apply a CASE-BY-CASE approach to determine whether to vote for or against directors nominated by outside parties whose interests may conflict with our interests as shareholders, regardless of whether management agrees with the nomination. | ||
PIM will evaluate and vote proposals to separate the Chairman and CEO positions in a company on a CASE-BY-CASE basis based on ISS opinions and recommendations as well as our personal assessment of the strength of the companies governing structure, the independence of the board and compliance with NYSE and NASDAQ listing requirements. | ||
k. | Support re-incorporation proposals that are in the best interests of | |
and shareholder value. | ||
l. | Support proposals enabling shareholders to call a special meeting of a | |
so long as a 15% threshold is necessary in order for shareholders to | ||
so. However, on a CASE-BY-CASE basis as determined by the Analyst | ||
the proxy, a 10% threshold may be deemed more appropriate should | ||
circumstances warrant; for example, in instances where executive | ||
or governance has been an issue for a company. | ||
m. | PIM may abstain from voting a proxy if we conclude that the effect of | |
on our clients economic interests or the value of the portfolio | ||
is indeterminable or insignificant. In addition, if a company imposes a | ||
period for purchases and sales of securities after a particular proxy is | ||
PIM generally will abstain from voting that proxy. |
It is understood that PIMs and ISS ability to commence voting proxies for new or transferred accounts is dependent upon the actions of custodians and banks in updating their records and forwarding proxies. PIM will not be liable for any action or inaction by any Custodian or bank with respect to proxy ballots and voting.
Where a new client has funded its account by delivering in a portfolio of securities for PIM to liquidate and the record date to vote a proxy for one of those securities falls on a day when we are temporarily holding the position (because we were still executing or waiting for settlement), we will vote the shares. For these votes only, we will defer to ISS recommendations, since we will not have firsthand knowledge of the companies and cannot devote research time to them.
Proxies for securities on loan through securities lending programs will generally not be voted. Since PIMs clients generally control these securities lending decisions, PIM may not be able to recall a security for voting purposes even if the issue is material; however, it will use its best efforts. In certain instances, PIMs commingled funds may participate in securities lending programs. PIM will use best efforts to have shares recalled in time to vote on material issues.
4. RETURN PROXIES
The Chief Compliance Officer or designee shall send or cause to be sent (or otherwise communicate) all votes to the company or companies soliciting the proxies within the applicable time period designated for return of such votes.
5. CLIENT DISCLOSURES
PIM will include a copy of these proxy voting policies and procedures, as they may be amended from time to time, in each new account pack sent to prospective clients. It also will update its ADV disclosures regarding these policies and procedures to reflect any material additions or other changes to them, as needed. Such ADV disclosures will include an explanation of how to request copies of these policies and procedures as well as any other disclosures required by Rule 206(4)-6 of the Advisers Act.
PIM will provide proxy voting summary reports to clients, on request. With respect to PIMs mutual fund clients, PIM will provide proxy voting information in such form as needed for them to prepare their Rule 30b1-4 Annual Report on Form N-PX.
6. | RECORDKEEPING | |||
A. | PIM will maintain a list of dedicated proxy contacts for its clients as required. Each client will be asked to provide the name, email address, telephone number, and post office mailing address of one or more persons who are authorized to receive, give direction under and otherwise act on any notices and disclosures provided by PIM pursuant to Section I.C.2.f of these policies. With respect to ERISA plan clients, PIM shall take all reasonable steps to ensure that the dedicated proxy contact for the ERISA client is a named fiduciary of the plan. | |||
B. | PIM will maintain and/or cause to be maintained by any proxy voting service provider engaged by PIM the following records. Such records will be maintained for a minimum of five years. Records maintained by PIM shall be kept for 2 years at PIMs principal office and 3 years in offsite storage. | |||
i. | Copies of PIMs proxy voting policies and procedures, and any amendments thereto. | |||
ii. | Copies of the proxy materials received by PIM for client securities. These may be in the form of the proxy packages received from each Company and/or ISS, or downloaded from EDGAR, or any combination thereof. | |||
iii. | The vote cast for each proposal overall as well as by account. | |||
iv. | Records of any correspondence made regarding specific proxies and the voting thereof. | |||
v. | Records of any reasons for deviations from broad voting guidelines. |
vi. | Copies of any document created by PIM that was material to making a decision on how to vote proxies or that memorializes the basis of that decision. |
vii. | A record of proxies that were not received, and what actions were taken to obtain them. |
viii. | Copies of any written client requests for voting summary reports (including reports to mutual fund clients for whom PIM has proxy voting authority containing information they need to satisfy their annual reporting obligations under Rule 30b-1-4 and to complete Form N-PX) and the correspondence and reports sent to the clients in response to such requests. |
7. REVIEW OF POLICIES
The proxy voting policies, procedures and guidelines contained herein have been formulated by PIMs proxy committee. This committee consists of PIMs Director of Research, CCO, and at least one Portfolio Manager (who represents the interests of all PIMs portfolio managers and is responsible for obtaining and expressing their opinions at committee meetings). The committee reviews these policies, procedures and guidelines at least annually, and makes such changes as it deems appropriate in light of current trends and developments in corporate governance and related issues, as well as operational issues facing the Firm.
II. CORPORATE ACTIONS
PIM is responsible for monitoring both mandatory (e.g. calls, cash dividends, exchanges, mergers, spin-offs, stock dividends and stock splits) and voluntary (e.g. rights offerings, exchange offerings, and tender offers) corporate actions. Operations personnel will ensure that all corporate actions received are promptly reviewed and recorded in PIMs portfolio accounting system, and properly executed by the custodian banks for all eligible portfolios. On a daily basis, a file of PIMs security database is sent to a third-party service, Vantage, via an automated upload which then provides corporate action information for securities included in the file.
This information is received and acted upon by the Operations personnel responsible for corporate action processing. In addition, PIM receives details on voluntary and some mandatory corporate actions from the custodian banks via email or online system and all available data is used to properly understand each corporate event.
Voluntary Corporate Actions - The Portfolio Management team is responsible for providing guidance to Operations on the course of action to be taken for each voluntary corporate action received. In some instances, the Portfolio Management team may maintain standing instructions on particular event types. As appropriate, Legal and Compliance may be consulted to determine whether certain clients may participate in particular corporate actions. Operations personnel will then notify each custodian banks, either through an online interface, via email, or with a signed faxed document of the election selected. Once all necessary information is received and the corporate action has been vetted, the event is processed in the portfolio accounting system and filed electronically. A log of holdings information related to the corporate action is maintained for each portfolio in order to confirm accuracy of processing.
III. CLASS ACTIONS
PIM shall not have any responsibility to initiate, consider or participate in any bankruptcy, class action or other litigation against or involving any issue of securities held in or formerly held in a client account or to advise or take any action on behalf of a client or former client with respect to any such actions or litigation.
Sanders Capital, LLC
Proxy Voting Guidelines
Sanders Capital, LLC has adopted proxy voting procedures and guidelines to govern proxy voting by the firm for use where our investment management clients have delegated to us the responsibility for voting proxies. We have established a Proxy Committee (the Committee), made up of senior officers of the firm, to administer the voting process and oversee the implementation of the resulting voting decisions. The firm has retained a proxy voting service to implement the Committee's decisions and keep records of votes taken for clients' accounts.
The overarching objective in voting is to support proposals and director nominees that maximize the value of shareholders' investments over the long term. Clients receive proposals that are varied and frequently complex. Our guidelines provide a rigorous framework for assessing each proposal on its merits, taking into account the particular facts and circumstances presented.
In evaluating proxy proposals, we consider information from many sources, including but not limited to the views of our investment management and research staff, the management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the companys board, absent guidelines or other specific facts that would support a voteagainst management. In all cases, however, the ultimate decision rests with the members of the Proxy Committee.
While serving as a framework, the following guidelines cannot contemplate all possible proposals with which we may be presented. In the absence of a specified guideline for a particular proposal, the Committee will evaluate the issue and cast a vote in a manner that, in the Committees view, will maximize the value of clients' investments. There may be cases where the Committee may not follow a particular guideline if it believes doing so will not be in clients' best interests. We may refrain from voting if that would be in our clients' interests - for example, if exercising the vote would result in the imposition of trading or other restrictions.
I. The Board of Directors
A. Election of directors
The Committee believes that good governance starts with a majority-independent board, whose key committees are made up entirely of independent directors. As such, the directors who serve on the Compensation, Nominating, and Audit committees should all be independent directors. We generally will support shareholder proposals that companies amend their by-laws to provide that director nominees be elected by an affirmative voteof a majority of the votes cast.
Unless there is a proxy fight for seats on the Board or we determine that there are compelling reasons for withholding votes for directors, we will generally support the boards nominees. But there are times when we will cast votes against this slate of nominees. The following factors will be taken into account in determining each vote:
Factors for Approval | Factors Against Approval |
Nominated slate results in board made up of a | Nominated slate results in board made up of a |
majority of independent directors | majority of non-independent directors. |
All members of the Audit, Nominating, and | Audit, Nominating, and/or Compensation |
Compensation committees are independent of | committees include non-independent |
management | members. |
Incumbent board member failed to attend at | |
least 75% of meetings in the previous year. | |
Actions of committee(s) on which nominee | |
serves are inconsistent with other guidelines | |
(e.g., excessive option grants, substantial non- | |
audit fees, lack of board independence). | |
Nominee is a CEO or other senior executive | |
who serves on more than two public company | |
boards in addition to his own, or, if not a CEO | |
or senior executive, serves on more than four | |
such boards. |
B. Contested director elections
In the case of contested board elections, we will evaluate the nominees qualifications, the performance of the incumbent board, as well as the rationale behind the dissidents campaign, to determine the outcome that we believe will maximize shareholder value.
C. Classified boards
The Proxy Committee will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures in which only part of the board is elected each year.
D. Independent chairperson
The Proxy Committee will consider relevant facts and circumstances in determining whether to support proposals for the Chairperson of the board be an independent director.
II. Approval of Independent Auditors
The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. We will generally support managements recommendation for the ratification of the auditor, except in instances in which audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) as well as if there are other reasons to question the independence or performance of the auditors.
III. Compensation Issues
A. Stock-based compensation plans
Appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders with the interests of management, employees, and directors. The Committee opposes plans that, taken together with shares available for grant under other existing plans, substantially dilute shareholders' ownership interests in the company, provide participants with excessive awards, or have inherently objectionable structural features. The Committee also generally opposes executive compensation plans where there is inadequate disclosure of the plans' terms.
The Proxy Committee 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 to company employees.
However, we will evaluate compensation proposals in the context of several factors (a companys industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the companys other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account.
The following factors will be among those considered in evaluating these proposals:
Factors for Approval | Factors Against Approval |
Company requires senior executives to hold a | Total potential dilution (including all |
minimum amount of company stock (frequently | stock-based plans) exceeds 15% of shares |
expressed as a multiple of salary). | outstanding. |
Annual option grants have exceeded 2% of | |
Company requires stock acquired through | shares outstanding. |
option exercise to be held for a certain period of | |
time. | Plan has below market value exercise prices |
on the date of issuance. | |
Compensation program includes performance- | Plan permits re-pricing or replacement of |
vesting awards, indexed options, or other | options without shareholder approval. |
performance-linked grants. | |
Plan provides for the issuance of reload | |
options. | |
Concentration of options grants to senior | Plan contains automatic share replenishment |
executives is limited (indicating that the plan is | (evergreen) feature. |
very broad-based). | |
Disclosure of terms of executive | |
compensation plan is inadequate. | |
Stock-based compensation is clearly used as a | |
substitute for cash in delivering market- | |
competitive total pay. | |
Company must expense compensatory | |
employee stock options. |
B. Bonus plans
Bonus plans, which must be periodically submitted to shareholder approval to qualify for deductibility under Section 162(m) of the IRC, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported.
C. Employee stock purchase plans
The Proxy Committee will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan amount to less than 5% of the outstanding shares.
D. Executive severance agreements (golden parachutes)
Although executives incentives for continued employment should be more significant than severance benefits, there are instancesparticularly in the event of a change in controlin which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executives salary and bonus may be generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonusor where severance is guaranteed absent a change in control should be submitted for shareholder approval.
IV. Corporate Structure and Shareholder Rights
The exercise of shareholder rights, in proportion to economic ownership, is a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. In general, the market for corporate control should be allowed to function without undue interference from these artificial barriers.
The Proxy Committee's positions on a number of the most commonly presented issues in this area are as follows:
A. | Shareholder rights plans (poison pills) |
A | companys adoption of a so-called poison pill effectively limits a potential acquirers ability to buy a |
controlling interest without the approval of the targets board of directions. Such a plan, in conjunction with other takeover defenses, may serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium.
In general, shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors:
Factors For Approval | Factors Against Approval |
Plan is relatively short-term (3-5 years). | Plan is long term (>5 years). |
Plan requires shareholder approval for | Renewal of plan is automatic or does not |
renewal. | require shareholder approval. |
Plan incorporates review by a committee of | Ownership trigger is less than 15%. |
independent directors at least every three | |
years (so-called TIDE provisions). | Classified board. |
Plan includes permitted-bid-/qualified-offer | Board with limited independence. |
feature (chewable pill) that mandates a | |
shareholder vote in certain situations. | |
Ownership trigger is reasonable (15-20%). | |
Highly independent, non-classified board. |
B. Cumulative voting
The Committee is generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation.
C. Supermajority vote requirements
The Committee supports shareholders ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, we will support proposals to remove supermajority requirements and oppose proposals to impose them.
D. Right to call meetings and act by written consent
The Committee supports proposals by ten percent or more of the shareholders to call special meetings of the board (for good cause) and to act by written consent. The Committee will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them.
E. Confidential voting
The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the Committee supports proposals to provide confidential voting.
F. Dual classes of stock
We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes.
G. Changes in Legal and Capital Structure
Unlike some of the changes described above, many changes in a company's charter, articles of incorporation of by-laws are technical and administrative in nature. The Proxy Committee generally votes in accordance with management's recommendations on such proposals. For example, we generally support proposals to increase authorized common stock when it is necessary to implement a stock split, aid in a restructuring or acquisition of which we approve, or provide sufficient shares for an employee savings plan, stock option plan or executive compensation.
V. Environmental, Social, and Governance ("ESG") Policy Issues
At Sanders Capital, ESG issues are an integral part of the fundamental research process. A responsible approach to ESG can confer competitive advantages to the companies that pursue them and pose considerable risks if disregarded. In our experience, companies that have a culture of "doing the right thing" make among the best investments especially when qualified (as they must be) on valuation grounds as well.
ESG related issues are explicitly evaluated when striking sustainable earnings power forecasts and the disposition of corporate cash flows. In this regard, the firm's co-CIOs take advantage of their multi-decade research management experience, covering almost all important industries and geographies. That experience has led us to the conviction that ESG should be an integrated component of the investment process to avoid exposure to:
Business models that threaten the environment in a manner that cannot be remediated, and thus may prove unsustainable;
Unethical business practices that can engender both financial andreputational damage;
Business models based on workforce compensation, benefits or other factorsthat appear
exploitative and thus unsustainable;
Misalignment of incentives and objectives of management, boards of directors,and other parties such that shareholder interests might be seriously compromised.
We utilize outside ESG experts -- Sustainalytics and Bloomberg (which also provides some ESG-specific information) and also engage with Hermes periodically to discuss trends and issues that they see unfolding. These providers can help us better understand the sustainability of our investments earnings power. In addition, we look to government and other independent databases of customer complaints, company-provided ESG reports, and explore issues highlighted by our internal and external research directly with management teams.
Our views on proxy issues that arise in various corporate governance issues and alignment of shareholder and management objectives with respect to compensation are addressed above. Proxy proposals that raise other ESG issues, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. The Committee generally believes that these ESG proposals are primarily the responsibility of management and should be evaluated and approved by the corporations board of directors, absent a compelling economic impact on shareholder value. The Committee may abstain from voting on these proposals.
VI. Political Contributions and Lobbying Expenses
The Committee generally supports proposals for disclosure of a company's contributions to political campaigns of candidates for federal, state or local office and other organizations that support such candidates. In general, the Committee does not support requirements that all lobbying expenses be disclosed.
VII. Proxy Voting Implementation
The Chief Investment Officers of Sanders Capital are responsible for the following functions: (1) analyzing proxy proposals using factors described in the guidelines; (2) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (3) determining how to vote proxies. The Director of Operations of Sanders Capital is responsible for oversight of the following functions: (1) managing proxy voting vendors and (2) oversight of the implementation of the voting instructions of the Chief Investment Officers. The Proxy Voting Committee also prepares periodic and special reports to the Board of Managers of Sanders Capital, and any proposed amendments to the procedures and guidelines.
VIII. The Proxy Voting Committee
The Board of Managers of Sanders Capital appoints the Proxy Voting Committee. The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision.
The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness, and Sanders Capital's Code of Ethics. In determining how to apply the guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of the firm's investment management clients in maximizing the value of their investments.
Clients may obtain a free copy of a report that details how the proxies relating to their account were voted by contacting the Chief Compliance Officer of Sanders Capital.
Wellington Management Global Proxy Policy and Procedures
Wellington Management has adopted and implemented policies and procedures that it believes are reasonably designed to ensure that proxies are voted in the best economic interests of clients for whom it exercises proxy-voting discretion.
Wellington Management's Proxy Voting Guidelines (the "Guidelines") set forth broad guidelines and positions on common proxy issues that Wellington Management uses in voting on proxies. In addition, Wellington Management also considers each proposal in the context of the issuer, industry and country or countries in which the issuer's business is conducted. The Guidelines are not rigid rules and the merits of a particular proposal may cause Wellington Management to enter a vote that differs from the Guidelines.
Statement of Policy
Wellington Management:
1) Votes client proxies for which clients have affirmatively delegated proxy-voting authority, in writing, unless it determines that it is in the best interest of one or more clients to refrain from voting a given proxy.
2) Votes all proxies in the best interests of the client for whom it is voting, i.e., to maximize economic value.
3) Identifies and resolves all material proxy-related conflicts of interest between the firm and its clients in the best interests of the client.
Responsibility and Oversight
The Investment Research Group ("Investment Research") monitors regulatory requirements with respect to proxy voting and works with the firm's Legal and Compliance Group and the Investment Stewardship Committee to develop practices that implement those requirements. Investment Research also acts as a resource for portfolio managers and research analysts on proxy matters as needed. Day-to-day administration of the proxy voting process is the responsibility of Investment Research. The Investment Stewardship Committee is responsible for oversight of the implementation of the Global Proxy Policy and Procedures, review and approval of the Guidelines and for providing advice and guidance on specific proxy votes for individual issuers.
Procedures
Use of Third-Party Voting Agent
Wellington Management uses the services of a third-party voting agent to manage the administrative aspects of proxy voting. The voting agent processes proxies for client accounts, casts votes based on the Guidelines and maintains records of proxies voted.
Receipt of Proxy
If a client requests that Wellington Management votes proxies on its behalf, the client must instruct its custodian bank to deliver all relevant voting material to Wellington Management or its voting agent.
Reconciliation
Each public security proxy received by electronic means is matched to the securities eligible to be voted and a reminder is sent to any custodian or trustee that has not forwarded the proxies as due. Although proxies received for private securities, as well as those received in non-electronic format, are voted as received, Wellington Management is not able to reconcile these proxies to holdings, nor does it notify custodians of non-receipt.
Research
In addition to proprietary investment research undertaken by Wellington Management investment professionals, Investment Research conducts proxy research internally, and uses the resources of a number of external sources to keep abreast of developments in corporate governance and of current practices of specific companies.
Proxy Voting
Following the reconciliation process, each proxy is compared against the Guidelines, and handled as follows:
Wellington Management reviews regularly the voting record to ensure that proxies are voted in accordance with these Global Proxy Policy and Procedures and the Guidelines; and ensures that documentation and reports, for clients and for internal purposes, relating to the voting of proxies are promptly and properly prepared and disseminated.
Material Conflict of Interest Identification and Resolution Processes
Wellington Management's broadly diversified client base and functional lines of responsibility serve to minimize the number of, but not prevent, material conflicts of interest it faces in voting proxies. Annually, the Investment Stewardship Committee sets standards for identifying material conflicts based on client, vendor, and lender relationships, and publishes those standards to individuals involved in the proxy voting process. In addition, the Investment Stewardship Committee encourages all personnel to contact Investment Research about apparent conflicts of interest, even if the apparent conflict does not meet the published materiality criteria. Apparent conflicts are reviewed by designated members of the Investment Stewardship Committee to determine if there is a conflict and if so whether the conflict is material.
If a proxy is identified as presenting a material conflict of interest, the matter must be reviewed by designated members of the Investment Stewardship Committee, who will resolve the conflict and direct the vote. In certain circumstances, the designated members may determine that the full Investment Stewardship Committee should convene.
Other Considerations
In certain instances, Wellington Management may be unable to vote or may determine not to vote a proxy on behalf of one or more clients. While not exhaustive, the following are potential instances in which a proxy vote might not be entered.
Securities Lending
In general, Wellington Management does not know when securities have been lent out pursuant to a client's securities lending program and are therefore unavailable to be voted. Efforts to recall loaned securities are not always effective, but, in rare circumstances, Wellington Management may recommend that a client attempt to have its custodian recall the security to permit voting of related proxies.
Share Blocking and Re-registration
Certain countries impose trading restrictions or requirements regarding re-registration of securities held in omnibus accounts in order for shareholders to vote a proxy. The potential impact of such requirements is evaluated when determining whether to vote such proxies.
Lack of Adequate Information, Untimely Receipt of Proxy Materials, or Excessive Costs
Wellington Management may abstain from voting a proxy when the proxy statement or other available information is inadequate to allow for an informed vote, when the proxy materials are not delivered in a timely fashion or when, in Wellington Management's judgment, the costs exceed the expected benefits to clients (such as when powers of attorney or consularization are required).
Additional Information
Wellington Management maintains records related to proxies pursuant to Rule 204-2 of the Investment Advisers Act of 1940 (the "Advisers Act"), the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and other applicable laws.
Wellington Management provides clients with a copy of its Global Proxy Policy and Procedures, including the Guidelines, upon written request. In addition, Wellington Management will make specific client information relating to proxy voting available to a client upon reasonable written request.
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