Statement of Additional Information dated March 15, 2013
This Statement of Additional Information (“SAI”) is not a Prospectus, and it should be read in conjunction with the Prospectus dated March 15, 2013, for each of the following series of
Manning & Napier Fund, Inc. (the “Fund”): U.S. Dividend Focus Series and International Dividend Focus Series, copies of which may be obtained from Manning & Napier Advisors, LLC, 290 Woodcliff Drive, Fairport, NY 14450.
This SAI relates to the Class S and I shares of each Series.
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Series
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Class
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Ticker
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U.S. Dividend Focus Series
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Class S
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U.S. Dividend Focus Series
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Class I
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International Dividend Focus Series
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Class S
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International Dividend Focus Series
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Class I
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TABLE OF CON
TENTS
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The Fund
The Fund is an open-end management investment company incorporated under the laws of the State of Maryland on July 26, 1984. The Board of Directors may, at its own discretion, create additional
series (and classes of such series) of shares, each of which would have separate assets and liabilities.
Each share of a Series represents an
identical interest in the investment portfolio of that Series and has the same rights, except that (i) each class of shares bears those distribution fees, shareholder service fees and administrative expenses applicable to the respective class
of shares as a result of its sales arrangements, which will cause the different classes of shares to have different expense ratios and to pay different rates of dividends, and (ii) each class has exclusive voting rights with respect to any
distribution and/or shareholder service fees which relate only to such class. As a result of each class’ differing amount of distribution and/or shareholder services fees, shares of different classes of the same Series may have different NAVs
per share.
The Fund does not expect to hold annual meetings of shareholders but special meetings of shareholders may be held under certain
circumstances. Shareholders of the Fund retain the right, under certain circumstances, to request that a meeting of shareholders be held for the purpose of considering the removal of a Director from office, and if such a request is made, the Fund
will assist with shareholder communications in connection with the meeting. The shares of the Fund have equal rights with regard to voting, redemption and liquidations. The Fund’s shareholders will vote in the aggregate and not by Series or
class except as otherwise expressly required by law or when the Board of Directors determines that the matter to be voted upon affects only the interests of the shareholders of a Series or a Class. Income, direct liabilities and direct operating
expenses of a Series will be allocated directly to the Series, and general liabilities and expenses of the Fund will be allocated among the Series in proportion to the total net assets of the Series by the Board of Directors. The holders of shares
have no preemptive or conversion rights. Shares when issued are fully paid and non-assessable and do not have cumulative voting rights.
Investment Goals
Each Series’ investment goal as well as its principal investment policies and strategies with respect to the composition of its portfolio are described in the prospectus. The following sections
provide more information about those principal policies and strategies as well as information about other policies and strategies. Each Series’ investment goal is not fundamental and may be changed by the Board of Directors without shareholder
approval. If there is a material change in a Series’ investment objective, shareholders will be notified thirty (30) days prior to any such change and will be advised to consider whether the Series remains an appropriate investment in
light of their then current financial position and needs. Each of the Series is a diversified mutual fund.
The investment strategy of the
U.S. Dividend Focus Series is to invest, under normal circumstances, at least 80% of its assets in dividend-paying common stocks of U.S. companies. The investment strategy of the International Dividend Focus Series is to invest, under normal
circumstances, at least 80% of its assets in dividend-paying common stocks of non-U.S. companies. Each Series will notify its shareholders at least sixty (60) days prior to any change in its investment strategy.
Investment Policies and Risks
The different types of investments in which a Series typically may invest, the investment techniques each may use, and the risks normally associated with these investments are discussed below.
Except as explicitly stated otherwise, all investment policies of the Series are non-fundamental and may be changed by the Board of Directors without
shareholder approval.
EQUITY INVESTMENTS
Common Stocks
. Each Series may purchase common stocks. Common stocks are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders, including holders of the entity’s preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to
do so.
Securities traded on over-the-counter (“OTC”) markets are not listed and traded on an organized exchange such as the New
York Stock Exchange (“NYSE”). Generally, the volume of trading in an unlisted or OTC common stock is less than the volume of trading in an exchange-listed stock. As a result, the market liquidity of some stocks in which the Series invest
may not be as great as that of exchange-listed stocks and, if the Series were to dispose of such stocks, the Series may have to offer the shares at a discount from recent prices, or sell the shares in small lots over an extended period of time.
Depository Receipts
. Each Series may purchase Depository Receipts. Depository Receipts represent an ownership interest in securities
of foreign companies (an “underlying issuer”) that are deposited with a depository. Depository Receipts are not necessarily denominated in the same currency as the underlying securities. American Depository Receipts (“ADRs”), are
dollar-denominated
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Depository Receipts typically issued by a U.S. financial institution which evidence an ownership interest in a security or pool of securities issued by a foreign issuer. ADRs are listed and
traded in the United States. Generally, Depository Receipts in registered form are designed for use in the U.S. securities market and Depository Receipts in bearer form are designed for use in securities markets outside the United States. ADRs are
subject to many of the risks associated with investing directly in foreign securities, which are described below.
Depository Receipts may be
“sponsored” or “unsponsored.” Sponsored Depository Receipts are established jointly by a depository and the underlying issuer, whereas unsponsored Depository Receipts may be established by a depository without participation by
the underlying issuer. Holders of unsponsored Depository Receipts generally bear all the costs associated with establishing unsponsored Depository Receipts. In addition, the issuers of the securities underlying unsponsored Depository Receipts are
not obligated to disclose material information in the United States and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depository
Receipts.
Initial Public Offerings
. Each Series may purchase shares issued as part of, or a short period after, a company’s
initial public offering (“IPO”), and may at times dispose of those shares shortly after their acquisition. The Series’ purchase of shares issued in IPOs exposes it to the risks associated with companies that have little operating
history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile, and share prices of newly-public companies have fluctuated significantly over
short periods of time.
Preferred Stocks
. Each Series may invest in preferred stocks. Preferred stocks may pay dividends at fixed
rates, and may entitle the holder to acquire the issuer’s stock by exchange or purchase for a predetermined rate.
Convertible
Securities
. Each Series may invest in securities that are convertible at either a stated price or a stated rate into underlying shares of common stock, thus enabling the investor to benefit from increases in the market price of the common stock.
Convertible securities are typically preferred stocks or bonds that are exchangeable for a specific number of another form of security (usually the issuer’s common stock) at a specified price or ratio. A convertible security generally entitles
the holder to receive interest paid or accrued on bonds or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. A corporation may issue a convertible security that is subject to
redemption after a specified date, and usually under certain circumstances. A holder of a convertible security that is called for redemption would be required to tender it for redemption to the issuer, convert it to the underlying common stock or
sell it to a third party. The convertible structure allows the holder of the convertible bond to participate in share price movements in the company’s common stock. The actual return on a convertible bond may exceed its stated yield if the
company’s common stock appreciates in value and the option to convert to common stocks becomes more valuable.
Convertible securities
typically pay a lower interest rate than nonconvertible bonds of the same quality and maturity because of the convertible feature. Convertible securities may be rated below investment grade (“high yield”) or not be rated, and are subject
to credit risk.
Prior to conversion, convertible securities have characteristics and risks similar to nonconvertible debt and equity
securities. In addition, convertible securities are often concentrated in economic sectors, which, like the stock market in general, may experience unpredictable declines in value, as well as periods of poor performance, which may last for several
years. There may be a small trading market for a particular convertible security at any given time, which may adversely impact market price and a Series’ ability to liquidate a particular security or respond to an economic event, including
deterioration of an issuer’s creditworthiness.
Convertible preferred stocks are nonvoting equity securities that pay a fixed dividend.
These securities have a convertible feature similar to convertible bonds, but do not have a maturity date. Due to their fixed income features, convertible securities provide higher income potential than the issuer’s common stock, but typically
are more sensitive to interest rate changes than the underlying common stock. In the event of a company’s liquidation, bondholders have claims on company assets senior to those of shareholders; preferred shareholders have claims senior to those
of common shareholders.
Convertible securities typically trade at prices above their conversion value, which is the current market value of
the common stock received upon conversion, because of their higher yield potential than the underlying common stock. The difference between the conversion value and the price of a convertible security will vary depending on the value of the
underlying common stock and interest rates. When the underlying value of the common stocks declines, the price of the issuer’s convertible securities will tend not to fall as much because the convertible security’s income potential will
act as a price support. While the value of a convertible security also tends to rise when the underlying common stock value rises, it will not rise as much because their conversion value is more narrow. The value of convertible securities also is
affected by changes in interest rates. For example, when interest rates fall, the value of convertible securities may rise because of their fixed income component.
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Warrants
. Each Series may purchase warrants. Warrants acquired by a Series entitle it to buy common
stock from the issuer at a specified price and time. Warrants may be considered more speculative than certain other types of investments because they (1) do not carry rights to dividends or voting rights with respect to the securities which the
warrant entitles the holder to purchase, and (2) do not represent any rights in the assets of the issuer. Warrants purchased by the Series may or may not be listed on a national securities exchange.
REITs
. Each Series may invest in shares of real estate investment trusts (“REITs”), which are pooled investment vehicles that invest in
real estate or real estate loans or interests. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. These risks may include, but are not limited to, the
following: declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; lack of ability to access the credit or capital markets; overbuilding; extended vacancies of
properties; defaults by borrowers or tenants, particularly during an economic downturn; increasing competition; increases in property taxes and operating expenses; changes in zoning laws; losses due to costs resulting from the clean-up of
environmental problems; liability to third parties for damages resulting from environmental problems; casualty or condemnation losses; limitations on rents; changes in market and sub-market values and the appeal of properties to tenants; and changes
in interest rates. Furthermore, REITs are dependent on specialized management skills. Some REITs may have limited diversification and may be subject to risks inherent in financing a limited number of properties. REITs depend generally on their
ability to generate cash flow to make distributions to shareholders or unitholders, and may be subject to defaults by borrowers and to self-liquidations. In addition, a REIT may be affected by its failure to qualify for tax-free pass-through of
income under the Internal Revenue Code of 1986, as amended (the “Code”) or its failure to maintain exemption from registration under the Investment Company Act of 1940 ( “1940 Act”). By investing in REITs indirectly through a
fund, shareholders will bear not only the proportionate share of the expenses of the fund, but also, indirectly, similar expenses of underlying REITs. Generally, REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs
invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity and Mortgage REITs.
REITs, especially Mortgage REITs, are subject to interest rate risk. In general, during periods of rising interest rates, REITs may lose some of their
appeal for investors who may be able to obtain higher yields from other income-producing investments, such as long term bonds. This may cause the price of REITs to decline, which may affect the price of a Series. Higher interest rates also increase
the cost of financing for property purchases and improvements and may make financing more difficult to obtain. During periods of declining interest rates, certain Mortgage REITs may hold mortgages that mortgagors elect to prepay, which can reduce
the yield on securities issued by Mortgage REITs. Mortgage REITs may be affected by the ability of borrowers to repay debts to the REIT when due and Equity REITs may be affected by the ability of tenants to pay rent. Ultimately, a REIT’s
performance depends on the types of properties it owns and how well the REIT manages its properties.
Investing in REITs involves risks
similar to those associated with investing in equity securities of small capitalization companies.
Trust Certificates, Partnership
Interests and Equity Participations
. Each Series may invest in equity securities that are interests in noncorporate entities. These securities, which include trust certificates, partnership interests and equity participations, have different
liability and tax characteristics than equity securities issued by a corporation, and thus may present additional risks to the Series. However, the investment characteristics of these securities are similar to those of traditional corporate equity
securities.
FIXED INCOME INVESTMENTS
Corporate Debt Obligations
. Each Series may invest in corporate debt obligations issued by financial institutions and corporations. Corporate debt obligations are subject to the risk of an
issuer’s inability to meet principal and interest payments on the obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market
liquidity.
U.S. Government Securities
. Each Series may invest in debt obligations of varying maturities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Direct obligations of the U.S. Treasury, which are backed by the full faith and credit of the U.S. Government, include a variety of Treasury securities that differ only in their interest rates,
maturities and dates of issuance. U.S. Government agencies or instrumentalities which issue or guarantee securities include, but are not limited to, the Federal Housing Administration, Federal National Mortgage Association (“Fannie Mae”),
Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association (“GNMA”), General Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks
(“FHLB”), Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”), Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration, the Tennessee Valley Authority, District of Columbia Armory
Board and the Student Loan Marketing Association (“Sallie Mae”). Obligations of U.S. Government agencies and instrumentalities such as Fannie Mae, FHLB, FHLMC and Sallie Mae are not supported by the full faith and credit of the United
States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others by
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discretionary authority of the U.S. Government to purchase the agencies’ obligations; while still others, such as Sallie Mae, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality does not meet its commitment.
A Series will invest in securities
of such instrumentalities only when the Fund’s investment advisor, Manning & Napier Advisors, LLC (“MNA” or the “Advisor”), is satisfied that the credit risk with respect to any instrumentality is consistent with
the Series’ goal and strategies.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and Freddie
Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained warrants for the purchase of common stock of each
instrumentality. Under these Senior Preferred Stock Purchase Agreements (SPAs), the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed, including the contribution of cash capital to the instrumentalities in the
event their liabilities exceed their assets. On May 6, 2009, the U.S. Treasury increased its maximum commitment to each instrumentality under the SPAs to $200 billion per instrumentality. On December 24, 2009, the U.S. Treasury further
amended the SPAs to allow the cap on Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction in Fannie Mae’s and Freddie Mac’s net worth through the end of 2012. At the conclusion of 2012, the
remaining U.S. Treasury commitment will then be fully available to be drawn per the terms of the SPAs. In December 2009, the U.S. Treasury also amended the SPAs to provide Fannie Mae and FreddieMac with some additional flexibility to meet the
requirement to reduce their mortgage portfolios. The actions of the U.S. Treasury are intended to ensure that Fannie Mae and Freddie Mac maintain a positive net worth and meet their financial obligations preventing mandatory triggering of
receivership. No assurance can be given that the U.S. Treasury initiatives will be successful.
Mortgage-Backed Securities
. Each Series
may invest in mortgage-backed securities which represent an interest in a pool of mortgage loans. Some of these securities are issued or guaranteed by U.S. Government agencies or instrumentalities such as GNMA, Fannie Mae, and FHLMC. Obligations of
GNMA are backed by the full faith and credit of the U.S. Government. Obligations of Fannie Mae and FHLMC are not backed by the full faith and credit of the U.S. Government. The market value and interest yield of these mortgage-backed securities can
vary due to market interest rate fluctuations and early prepayments of underlying mortgages. These securities represent ownership in a pool of federally insured mortgage loans with a maximum maturity of 30 years. However, due to scheduled and
unscheduled principal payments on the underlying loans, these securities have a shorter average maturity and, therefore, less principal volatility than a comparable 30-year bond. Since prepayment rates vary widely, it is not possible to accurately
predict the average maturity of a particular mortgage-backed security. The scheduled monthly interest and principal payments relating to mortgages in the pool will be “passed through” to investors. Government mortgage-backed securities
differ from conventional bonds in that principal is paid back to the certificate holders over the life of the loan rather than at maturity. As a result, there will be monthly scheduled payments of principal and interest. In addition, there may be
unscheduled principal payments representing prepayments on the underlying mortgages. Although these securities may offer yields higher than those available from other types of U.S. Government securities, mortgage-backed securities may be less
effective than other types of securities as a means of “locking in” attractive long-term rates because of the prepayment feature. For instance, when interest rates decline, the value of these securities likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these prepayments can cause the price of a mortgage-backed security originally purchased at a premium to decline in price to its par value, which may result in a loss.
Obligations of Supranational Agencies
. The International Dividend Focus Series may purchase securities issued or guaranteed by
supranational agencies including, but not limited to, the following: Asian Development Bank, Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Coal and Steel
Community, European Union, and the European Investment Bank. For concentration purposes, supranational entities are considered an industry. Investment in these entities is subject to the Series’ other restrictions on investments in foreign
securities, described below.
Zero-Coupon Bonds
. Each Series may invest in so-called “zero-coupon” bonds. Zero-coupon bonds
are issued at a significant discount from face value and generally pay interest only at maturity rather than at intervals during the life of the security. Each Series is required to accrue and distribute income from zero-coupon bonds on a current
basis, even though it does not receive that income currently in cash. Thus, a Series may have to sell investments to obtain cash needed to make income distributions. The discount, in the absence of financial difficulties of the issuer, decreases as
the final maturity of the security approaches. Zero-coupon bonds can be sold prior to their maturity date in the secondary market at the then prevailing market value, which depends primarily on the time remaining to maturity, prevailing level of
interest rates and the perceived credit quality of the issues. The market prices of zero-coupon securities are subject to greater fluctuations in response to changes in market interest rates than bonds which pay interest currently.
Variable and Floating Rate Instruments
. Certain of the obligations that may be purchased by the Series may carry variable or floating rates of
interest. These obligations may involve a conditional or unconditional demand feature and may include variable amount
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master demand notes. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices, such as a Federal Reserve composite index. The
interest rate on these securities may be reset daily, weekly, quarterly, or at some other interval, and it may have a floor or ceiling rate. There is a risk that the current interest rate on such obligations may not accurately reflect existing
market interest rates.
Short-Term Investments/Temporary Defensive Positions
. For temporary defensive purposes during periods when
the Advisor determines that market conditions warrant, each Series may depart from its investment goals and invest up to 100% of its assets in all types of money market instruments (including securities guaranteed by the U.S. Government, its
agencies or instrumentalities, certificates of deposit, time deposits and bankers’ acceptances issued by banks or savings and loan institutions deemed creditworthy by the Advisor, commercial paper rated A-1 by S&P or Prime-1 by
Moody’s, repurchase agreements involving such securities and shares of other investment companies as permitted by applicable law) and may hold a portion of its assets in cash. For a description of the above ratings, see Appendix A.
Risks of Fixed Income Securities
. Investments in fixed income securities may subject a Series to risks, including the following:
Interest Rate Risk
. When interest rates decline, the market value of fixed income securities tends to increase. Conversely, when
interest rates increase, the market value of fixed income securities tends to decline. The volatility of a security’s market value will differ depending upon the security’s maturity and duration, the issuer and the type of instrument.
Default Risk/Credit Risk
. Investments in fixed income securities are subject to the risk that the issuer of the
security could default on its obligations, causing a Series to sustain losses on such investments. A default could impact both interest and principal payments.
Call Risk and Extension Risk
. Fixed income securities may be subject to both call risk and extension risk. Call risk exists when the issuer may exercise its right to pay principal on an obligation
earlier than scheduled, which would cause cash flows to be returned earlier than expected. This typically results when interest rates have declined and a Series will suffer from having to reinvest in lower yielding securities. Extension risk exists
when the issuer may exercise its right to pay principal on an obligation later than scheduled, which would cause cash flows to be returned later than expected. This typically results when interest rates have increased, and a Series will suffer from
the inability to invest in higher yield securities.
DERIVATIVE TRANSACTIONS
In General
. Each Series has reserved the right, subject to authorization by the Board of Directors prior to implementation, to engage in certain strategies in an attempt to hedge the Series’
portfolios, that is, to reduce the overall level of risk that normally would be expected to be associated with their investments. Each Series may write covered call options on common stocks; may purchase and sell (on a secured basis) put options;
and may engage in closing transactions with respect to put and call options. The International Dividend Focus Series also may purchase forward foreign currency exchange contracts to hedge currency exchange rate risk. In addition, each Series is
authorized to purchase and sell stock index futures contracts and options on stock index futures contracts. The International Dividend Focus Series is also authorized to conduct spot (i.e., cash basis) currency transactions or to use currency
futures contracts and options on futures contracts and foreign currencies in order to protect against uncertainty in the future levels of foreign currency exchange rates. These strategies are primarily used for hedging purposes; nevertheless, there
are risks associated with these strategies as described below.
Options on Securities
. As a means of protecting its assets against
market declines, and in an attempt to earn additional income, each Series may write covered call option contracts on its securities and may purchase call options for the purpose of terminating its outstanding obligations with respect to securities
upon which covered call option contracts have been written.
When a Series writes a call option on securities which it owns, it gives the
purchaser of the option the right to buy the securities at an exercise price specified in the option at any time prior to the expiration of the option. If any option is exercised, a Series will realize the gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the net premium originally received on the sale of the option. By writing a covered call option, a Series may forego, in exchange for the net premium, the opportunity to profit
from an increase in the price of the underlying security above the option’s exercise price. A Series will have kept the risk of loss if the price of the security declines, but will have reduced the effect of that risk to the extent of the
premium it received when the option was written.
A Series will write only covered call options which are traded on national securities
exchanges. Currently, call options on stocks may be traded on the Chicago Board Options Exchange and the New York, American, Pacific and Philadelphia Stock Exchanges. Call options are issued by the Options Clearing Corporation (“OCC”),
which also serves as the clearinghouse for transactions with respect to standardized or listed options. The price of a call option is paid to the writer without refund on expiration or exercise, and no portion of the price is retained by OCC or the
exchanges listed above. Writers and purchasers of options pay the transaction costs, which may include commissions charged or incurred in connection with such option transactions.
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A call option is considered to be covered if the option writer owns the security underlying the call or has
an absolute and immediate right to acquire that security without payment of additional cash consideration (or for additional cash consideration held in a separate account) upon conversion or exchange of other securities. A call option is also
considered to be covered if the writer holds on a unit-for-unit basis a call on the same security as the call written, has the same expiration date and the exercise price of the call purchased is equal to or less than the exercise price of the call
written or greater than the exercise price of the call written if the difference is maintained in cash or other liquid securities in a separate account, and marked-to-market daily. A Series will not sell (uncover) the securities against which
options have been written until after the option period has expired, the option has been exercised or a closing purchase has been executed.
Options written by a Series will have exercise prices which may be below (“in-the-money”), equal to (“at-the-money”) or above
(“out-of-the-money”) the market price of the underlying security at the time the options are written. However, a Series generally will not write so-called “deep-in-the-money” options.
The market value of a call option generally reflects the market price of the underlying security. Other principal factors affecting market value include
supply and demand, dividend yield and interest rates, the price volatility of the underlying security and the time remaining until the expiration date.
If a call option written by a Series expires unexercised, the Series will realize a gain in the amount of the premium on the option, less all commissions paid. Such a gain, however, may be offset by a
decline in the value of the underlying security during the option period. If a call option written by a Series is exercised, the Series will realize a gain or loss from the sale of the underlying security equal to the difference between the cost of
the underlying security and the proceeds of the sale of the security (exercise price minus commission) plus the amount of the premium on the option, less all commissions paid.
Call options may also be purchased by a Series, but only to terminate (entirely or in part) a Series’ obligation as a writer of a call option. This is accomplished by making a closing purchase
transaction, that is, the purchase of a call option on the same security with the same exercise price and expiration date as specified in the call option which had been written previously. A closing purchase transaction with respect to calls traded
on a national securities exchange has the effect of extinguishing the obligation of the writer of a call option. A Series may enter into a closing purchase transaction, for example, to realize a profit on an option it had previously written, to
enable it to sell the security which underlies the option, to free itself to sell another option or to prevent its portfolio securities from being purchased pursuant to the exercise of a call. A Series may also permit the call option to be
exercised. A closing transaction cannot be effected with respect to an optioned security once a Series has received a notice that the option is to be exercised.
The cost to a Series of such a closing transaction may be greater than the net premium received by a Series upon writing the original call option. A profit or loss from a closing purchase transaction will
be realized depending on whether the amount paid to purchase a call to close a position is less or more than the amount received from writing the call. Any profit realized by a Series from the execution of a closing transaction may be partly or
completely offset by a reduction in the market price of the underlying security.
A Series may also write secured put options and enter into
closing purchase transactions with respect to such options. A Series may write secured put options on national securities exchanges to obtain, through the receipt of premiums, a greater return than would be realized on the underlying securities
alone. A put option gives the purchaser of the option the right to sell, and the writer has the obligation to buy, the underlying security at the stated exercise price during the option period. The secured put writer retains the risk of loss should
the market value of the underlying security decline below the exercise price of the option. During the option period, the writer of a put option may be required at any time to make payment of the exercise price against delivery of the underlying
security.
The operation of put options in other respects is substantially identical to that of call options. The Fund will earmark or
segregate cash or liquid assets equal to the amount of the Series’ assets that could be required to consummate the put options. If the value of such assets declines, additional cash or assets will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Series.
A Series may write secured put options when the Advisor wishes
to purchase the underlying security for a Series’ portfolio at a price lower than the current market price of the security. In such event a Series would write a secured put option at an exercise price which, reduced by the premium received on
the option, reflects the lower price it is willing to pay. The potential gain on a secured put option is limited to the income earned on the amount held in liquid assets plus the premium received on the option (less the commissions paid on the
transaction) while the potential loss equals the difference between the exercise price of the option and the current market price of the underlying securities when the put is exercised, offset by the premium received (less the commissions paid on
the transaction) and income earned on the amount held in liquid assets.
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A Series may purchase put options on national securities exchanges in an attempt to hedge against
fluctuations in the value of its portfolio securities and to protect against declines in the value of individual securities. Purchasing a put option allows the purchaser to sell the particular security covered by the option at a certain price (the
“exercise price”) at any time up to a specified future date (the “expiration date”).
Purchase of a put option creates a
“hedge” against a decline in the value of the underlying security by creating the right to sell the security at a specified price. Purchase of a put option requires payment of a premium to the seller of that option. Payment of this premium
necessarily reduces the return available on the individual security should that security continue to appreciate in value. In return for the premium paid, a Series protects itself against substantial losses should the security suffer a sharp decline
in value. In contrast to covered call option writing, where the writer obtains greater current income at the risk of foregoing potential future gains, the purchaser of a put option is in effect foregoing current income in return for reducing the
risk of potential future losses.
A Series may purchase put options as a means of “locking in” profits on securities held in the
portfolio. Should a security increase in value from the time it is initially purchased, a Series may seek to lock in a certain profit level by purchasing a put option. Should the security thereafter continue to appreciate in value the put option
will expire unexercised and the total return on the security, if it continues to be held by a Series, will be reduced by the amount of premium paid for the put option. At the same time, a Series will continue to own the security, and should the
security decline in value below the exercise price of the put option, a Series may elect to exercise the option and “put” or sell the security to the party that sold the put option to that Series at the exercise price. In this case, a
Series would have a higher return on the security than would have been possible if a put option had not been purchased.
Risk Factors and
Certain Other Factors Relating to Options
. Positions in options on securities may be closed only by a closing transaction, which may be made only on an exchange which provides a liquid secondary market for such options. Although a Series will
write options only when the Advisor believes a liquid secondary market will exist on an exchange for options of the same security, there can be no assurance that a liquid secondary market will exist for any particular security option. If no liquid
secondary market exists respecting an option position held, a Series may not be able to close an option position, which will prevent that Series from selling any security position underlying an option until the option expires and may have an adverse
effect on its ability effectively to hedge its security positions. A secured put option writer who is unable to effect a closing purchase transaction would continue to bear the risk of decline in the market price of the underlying security until the
option expires or is exercised. In addition, a Series would be unable to use the cash or liquid assets held as security for the put option for other investment purposes until the exercise or expiration of the option.
Possible reasons for the absence of a liquid secondary market on an exchange include the following: (i) insufficient trading; (ii) restrictions
that may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions that may be imposed with respect to particular classes or series of contracts, or underlying
securities; (iv) unusual or unforeseen circumstances that may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not be adequate to handle unusual trading volume; or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of contracts (or particular classes or series of contracts), in which event the secondary market on that exchange would cease
to exist, although outstanding contracts on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may
interfere with timely execution of customers’ orders.
Each of the exchanges on which options on securities are traded has established
limitations on the number of options which may be written by any one investor or group of investors. These limitations apply regardless of whether the options are written in different accounts or through different brokers. It is possible that a
Series and certain other accounts managed by the Advisor may constitute such a group. If so, the options positions of the Series may be aggregated with those of other clients of the Advisor.
Although the OCC has stated that it believes (based on forecasts provided by the exchanges on which options are traded), that its facilities are adequate to handle the volume of reasonably anticipated
options transactions, and although each exchange has advised the OCC that it believes that its facilities will also be adequate to handle reasonably anticipated volume, there can be no assurance that higher than anticipated trading activity or order
flow or other unforeseen events might not at times render certain of these facilities inadequate and thereby result in the institution of special trading procedures or restrictions.
A Series will pay brokerage and other transaction costs to write and purchase options on securities, including any closing transactions, which the Series may execute. Therefore, frequent writing and/or
purchasing of options may increase the transaction costs borne by a Series.
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Stock Index Futures Contracts and Options on Stock Index Futures Contracts
. Each Series may enter
into stock index futures contracts to provide: (i) a hedge for a portion of the Series’ portfolio; (ii) a cash management tool; or (iii) an efficient way to implement either an increase or decrease in portfolio market exposure in
response to changing market conditions. The Series may also use stock index futures as a substitute for comparable market position in the underlying securities. Although techniques other than the sale and purchase of stock index futures contracts
could be used to adjust the exposure or hedge a Series’ portfolio, a Series may be able to do so more efficiently and at a lower cost through the use of stock index futures contracts.
A stock index futures contract is a contract to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of a
stock index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of a stock index is commonly referred to as selling a contract or holding a short position. A
stock index future obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. The Series intend to purchase and sell futures contracts on the stock index for which they can obtain the best price with consideration
also given to liquidity.
The Series will not enter into a stock index futures contract or option thereon if, as a result thereof, the sum of
the amount of initial margin deposits on any such futures (plus deposits on any other futures contracts and premiums paid in connection with any options or futures contracts) that do not constitute “bona fide hedging” under Commodity
Futures Trading Commission (“CFTC”) rules would exceed 5% of the liquidation value of the Series’ total assets after taking into account unrealized profits and losses on such contracts. In addition, the value of all futures contracts
sold will not exceed the total market value of the Series’ portfolio. A Series will comply with guidelines established by the SEC with respect to the covering of obligations under futures contracts and will earmark or segregate cash or liquid
assets in the amount prescribed.
Unlike the purchase or sale of an equity security, no price is paid or received by a Series upon the
purchase or sale of a stock index futures contract. Upon entering into a futures contract, a Series would be required to deposit into a separate account in the name of the futures broker an amount of cash or liquid securities known as “initial
margin.” This amount is required by the rules of the exchanges and is subject to change. The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures margin does not involve the
borrowing of funds by the Series to finance the transactions. Rather, initial margin is in the nature of a performance bond or good faith deposit on the contract that is returned to the Series upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
Subsequent payments, called “variation margin”, to and from the futures broker, are
made on a daily basis as the price of the underlying stock index fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as “marking-to-market”. For example, when the Series has
purchased a stock index futures contract and the price of the underlying stock index has risen, that futures position will have increased in value and a Series will receive from the broker a variation margin payment equal to that increase in value.
Conversely, when a Series has purchased a stock index futures contract and the price of the stock index has declined, the position would be less valuable and the Series would be required to make a variation payment to the broker.
The loss from investing in futures transactions is potentially unlimited. To limit such risk, a Series will not enter into stock index futures contracts
for speculation and will only enter into futures contracts which are traded on established futures markets. A Series may purchase or sell stock index futures contracts with respect to any stock index, but the Advisor anticipates that it will sell
stock index futures contracts with respect to indices whose movements will, in its judgment, have a significant correlation with movements in the prices of the Series’ portfolio securities.
Closing out an open stock index futures contract sale or purchase is effected by entering into an offsetting stock index futures contract purchase or
sale, respectively, for the same aggregate amount of identical underlying with the same delivery date. If the offsetting purchase price is less than the original sale price, the Series realizes a gain; if it is more, the Series realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase price, the Series realizes a gain; if it is less, the Series realizes a loss. If the Series is not able to enter into offsetting transactions, the Series will continue to be
required to maintain the margin deposits on the stock index futures contract.
A Series may elect to close out some or all of its futures
positions at any time prior to expiration. The purpose of making such a move would be either to reduce equity exposure represented by long futures positions or increase equity exposure represented by short futures positions. A Series may close its
positions by taking opposite positions which would operate to terminate a Series’ position in the stock index futures contracts. Final determinations of variation margin would then be made, additional cash would be required to be paid or
released to the Series, and the Series would realize a loss or a gain.
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Stock index futures contracts may be closed out only on the exchange or board of trade where the contracts
were initially traded. Although a Series intends to purchase or sell stock index futures contracts only on exchanges or boards of trade where there appears to be an active market, there is no assurance that a liquid market on an exchange or board of
trade will exist at any particular time. Accordingly, it might not be possible to close a stock index futures contract, and in the event of adverse price movements, the Series would continue to be required to make daily cash payments of variation
margin. However, in the event stock index futures contracts have been used to hedge portfolio securities, the Series would continue to hold securities subject to the hedge until the stock index futures contracts could be terminated. In such
circumstances, an increase in the price of the securities, if any, might partially or completely offset losses on the stock index futures contract. However, as described below, there is no guarantee that the price of the securities will, in fact,
correlate with price movements in the futures contract and thus provide an offset to losses on a stock index futures contract.
There are
several risks in connection with the use by a Series of stock index futures contracts as a hedging device. One risk arises because of the imperfect correlation between movements in the prices of the futures contracts and movements in the prices of
securities which are the subject of the hedge. The Advisor will attempt to reduce this risk by entering into stock index futures contracts on indices whose movements, in its judgment, will have a significant correlation with movements in the prices
of the Series’ portfolio securities sought to be hedged.
Successful use of stock index futures contracts by a Series for hedging
purposes also depends on the Advisor’s ability to correctly predict movements in the direction of the market. It is possible that, when a Series has sold futures to hedge its portfolio against a decline in the market, the index or indices on
which the futures are written might advance and the value of securities held in the Series’ portfolio might decline. If this were to occur, the Series would lose money on the futures and also would experience a decline in value in its portfolio
securities. However, while this might occur to a certain degree, the Advisor believes that over time the value of the Series’ portfolio will tend to move in the same direction as the securities underlying the futures, which are intended to
correlate to the price movements of the portfolio securities sought to be hedged. It is also possible that if the Series were to hedge against the possibility of a decline in the market (adversely affecting stocks held in their portfolios) and stock
prices instead increased, the Series would lose part or all of the benefit of increased value of those stocks that they had hedged, because they would have offsetting losses in their futures positions. In addition, in such situations, if a Series
had insufficient cash, it might have to sell securities to meet its daily variation margin requirements. Such sales of securities might be, but would not necessarily be, at increased prices (which would reflect the rising market). Moreover, a Series
might have to sell securities at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an
imperfect correlation, or no correlation at all, between price movements in the stock index futures contracts and the portion of the portfolio to be hedged, the price movements in the futures contracts might not correlate perfectly with price
movements in the underlying stock index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements,
investors might close stock index futures contracts through offsetting transactions, which could distort the normal relationship between the index and futures markets. Second, the margin requirements in the futures market are less onerous than
margin requirements in the securities markets. Due to the possibility of price distortion in the futures market and also because of the imperfect correlation between price movements in the stock index and movements in the prices of stock index
futures contracts, even a correct forecast of general market trends by the Advisor might not result in a successful hedging transaction over a very short time period.
Options on futures give the purchaser the right, in return for a premium paid, to assume a position in a futures contract (a long position if a call option and a short position if a put option), rather
than to purchase or sell the stock index futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance in the writer’s futures margin account which represents the amount by which the market price of the stock index futures contract, at exercise, exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the option on the futures contract. Alternatively, settlement may be made totally in cash.
A Series may seek to close out an option position on an index by writing or buying an offsetting option covering the same index or contract and having the same exercise price and expiration date. The
ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop. See “Risk Factors and Certain Other Factors Relating
to Options” above for possible reasons for the absence of a liquid secondary market on an exchange.
Futures on Securities
. A
futures contract on a security is a binding contractual commitment which, if held to maturity, will result in an obligation to make or accept delivery, during a particular month, of securities having a standardized face value and rate of return.
Futures contracts by law are not permitted on municipal securities but are traded on government securities, broad-based indexes of securities, and certain corporate equity securities (single stock futures). By purchasing futures on securities, the
Fund will legally obligate itself to accept delivery of the underlying security and pay the agreed price; by selling futures on securities, it will legally
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obligate itself to make delivery of the security against payment of the agreed price. Open futures positions on securities are valued at the most recent settlement price, unless such price does
not reflect the fair value of the contract, in which case the positions will be valued by or under the direction of the Board of Directors.
Positions taken in the futures markets are not normally held to maturity, but are instead liquidated through offsetting transactions which may result in
a profit or a loss. While a Series’ futures contracts on securities will usually be liquidated in this manner, it may instead make or take delivery of the underlying securities whenever it appears economically advantageous for the Series to do
so. However, the loss from investing in futures transactions is potentially unlimited. A clearing corporation associated with the exchange on which futures on securities or currency are traded guarantees that, if still open, the sale or purchase
will be performed on the settlement date.
Foreign Currency Transactions
. In order to protect against a possible loss on investments
resulting from a decline in a particular foreign currency against the U.S. dollar or another foreign currency, the International Dividend Focus Series is authorized to enter into forward foreign currency exchange contracts. In addition, the Series
is authorized to conduct spot (i.e., cash basis) currency transactions or to use currency futures contracts, options on such futures contracts, and options on foreign currencies in order to protect against uncertainty in the future levels of
currency exchange rates.
Forward Foreign Currency Exchange Contracts
. Forward foreign currency exchange contracts involve an
obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow a Series to establish a
rate of exchange for a future point in time. The International Dividend Focus Series may enter into forward foreign currency exchange contracts when deemed advisable by the Advisor under only two circumstances.
First, when entering into a contract for the purchase or sale of a security in a foreign currency, the Series may enter into a forward foreign currency
exchange contract for the amount of the purchase or sale price to protect against variations, between the date the security is purchased or sold and the date on which payment is made or received, in the value of the foreign currency relative to the
U.S. dollar or other foreign currency. This hedging technique is known as “transaction hedging”.
Second, when the Advisor
anticipates that a particular foreign currency may decline substantially relative to the U.S. dollar or other leading currencies, in order to reduce risk, the Series may enter into a forward contract to sell, for a fixed amount, the amount of
foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This hedging technique is known as “position hedging”. With respect to any such forward foreign currency contract, it
will not generally be possible to match precisely the amount covered by that contract and the value of the securities involved due to the changes in the values of such securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts may offer protection from losses resulting from declines in the value of a particular foreign currency, they also limit potential gains which might result from increases
in the value of such currency. A Series will also incur costs in connection with forward foreign currency exchange contracts and conversions of foreign currencies and U.S. dollars.
The International Dividend Focus Series will earmark or segregate cash or liquid securities equal to the amount of that Series’ assets that would be required to consummate forward contracts entered
into under the second circumstance, as set forth above. For the purpose of determining the adequacy of the securities, the securities will be valued at market or fair value. If the market or fair value of such securities declines, additional cash or
securities will be earmarked or segregated daily so that the value will equal the amount of such commitments by such Series.
Currency
Futures Contracts and Options on Futures Contracts
. The International Dividend Focus Series is authorized to purchase and sell currency futures contracts and options thereon. Currency futures contracts involve entering into contracts for the
purchase or sale for future delivery of foreign currencies. A “sale” of a currency futures contract (i.e., short) means the acquisition of a contractual obligation to deliver the foreign currencies called for by the contract at a specified
price on a specified date. A “purchase” of a futures contract (i.e., long) means the acquisition of a contractual obligation to acquire the foreign currencies called for by the contract at a specified price on a specified date. These
investment techniques will be used only to hedge against anticipated future changes in exchange rates which otherwise might either adversely affect the value of portfolio securities held by the Series or adversely affect the prices of securities
which the Series intend to purchase at a later date. The loss from investing in futures transactions is potentially unlimited. To minimize this risk, such instruments will be used only in connection with permitted transaction or position hedging and
not for speculative purposes. The Series will not enter into a currency futures contract or option thereon, if as a result thereof, the sum of the amount of initial margin deposits on any such futures (plus deposits on any other futures contracts
and premiums paid in connection with any options or futures contracts) that do not constitute “bona fide hedging” under CFTC rules will exceed 5% of the liquidation value of the Series’ total assets after taking into account
unrealized profits and losses on such contracts. In addition, the value of all futures contracts sold will not exceed the total market value of the Series’ portfolio. The Series will comply with guidelines established by the SEC with respect to
covering of obligations under futures contracts and will earmark on the books of the Series or segregate cash and/or liquid securities in a separate account in the amount prescribed.
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Although the Series intends to purchase or sell futures contracts only if there is an active market for such
contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. In addition, due to the risk of an imperfect correlation between securities in the Series’ portfolio that are the subject
of a hedging transaction and the futures contract used as a hedging device, it is possible that the hedge will not be fully effective. For example, losses on the portfolio securities may be in excess of gains on the futures contract or losses on the
futures contract may be in excess of the gains on the portfolio securities that were the subject of such hedge.
Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be maintained for such contract. Although futures contracts typically require actual delivery of and payment for financial instruments or currencies, the contracts are usually closed
out before the delivery date. Closing out an open futures contract sale or purchase is effected by entering into an offsetting futures contract purchase or sale, respectively, for the same aggregate amount of the identical type of financial
instrument or currency and the same delivery date. If the offsetting purchase price is less than the original sale price, the Series realizes a gain; if it is more, the Series realizes a loss. Conversely, if the offsetting sale price is more than
the original purchase price, the Series realizes a gain; if it is less, the Series realizes a loss. Transaction costs must also be included in these calculations. There can be no assurance, however, that the Series will be able to enter into an
offsetting transaction with respect to a particular contract at a particular time. If the Series is not able to enter into an offsetting transaction, it will continue to be required to maintain the margin deposits on the contract. The ability to
establish and close out positions on such options is dependent on the existence of a liquid secondary market. It is not certain that a liquid market will exist for any particular futures contracts. See “Risk Factors and Certain Other Factors
Relating to Options” above for possible reasons for the absence of a liquid secondary market on an exchange.
An option on a futures
contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if a call option and a short position if a put option) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an offsetting futures position (a short position if a call option and a long position if a put option). Upon exercise of the option, the assumption of offsetting futures positions
by the writer and holder of the option will be accompanied by delivery of the accumulated cash balance in the writer’s futures margin account which represents the amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract.
Call options sold by
the Series with respect to futures contracts will be covered by, among other things, entering into a long position in the same contract at a price no higher than the strike price of the call option, or by ownership of the instruments underlying the
futures contract, or by earmarking or segregating cash or liquid securities in an amount sufficient to fulfill the obligations undertaken by the futures contract. A put option sold by the Series is covered when, among other things, cash or liquid
assets are earmarked on the books of the Series or placed in a segregated account to fulfill the obligations undertaken.
Foreign Currency
Options
. The International Dividend Focus Series is authorized to purchase and write put and call options on foreign currencies. A call option is a contract whereby the purchaser, in return for a premium, has the right, but not the obligation,
to buy the currency underlying the option at a specified price during the exercise period. The writer of the call option, who receives the premium, has the obligation, upon exercise of the option during the exercise period, to deliver the underlying
currency against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying currency at a specified price during the term of the option. The writer of the put
option, who receives the premium, has the obligation, upon exercise of the option during the option period, to buy the underlying currency at the exercise price. The Series will use currency options only to hedge against the risk of fluctuations of
foreign exchange rates related to securities held in its portfolio or which it intends to purchase, and to earn a higher return by receiving a premium for writing options. Options on foreign currencies are affected by all the factors that influence
foreign exchange rates and investments generally.
Risks Associated with Hedging Strategies
. There are risks associated with the
hedging strategies described above, including the following: (1) the success of a hedging strategy may depend on the ability of the Advisor to accurately predict movements in the prices of individual securities, fluctuations in domestic and
foreign markets and currency exchange rates, and movements in interest rates; (2) there may be an imperfect correlation between the changes in market value of the securities held by a Series and the prices of currency contracts, options,
futures and options on futures; (3) there may not be a liquid secondary market for a currency contract, option, futures contract or futures option; (4) trading restrictions or limitations may be imposed by an exchange; and
(5) government regulations, particularly requirements for qualification as a “regulated investment company” under the Code, may restrict trading in forward currency contracts, options, futures contracts and futures options.
Even a small investment in derivative contracts can have a big impact on stock market, currency and interest rate exposure. Derivatives can
also make a Series less liquid and harder to value, especially in declining markets.
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OTHER INVESTMENT POLICIES
Foreign Securities
. The International Dividend Focus Series will, under normal circumstances, invest at least 80% of its assets in securities of non-U.S. companies.
Risks of Foreign Securities
. There are risks in investing in foreign securities not typically involved in domestic investing. An investment in
foreign securities may be affected by changes in currency rates and in exchange control regulations. Foreign companies are frequently not subject to the accounting and financial reporting standards applicable to domestic companies, and there may be
less information available about foreign issuers. There is frequently less government regulation of foreign issuers than in the United States. In addition, investments in foreign countries are subject to the possibility of expropriation or
confiscatory taxation, political or social instability or diplomatic developments that could adversely affect the value of those investments. There may also be imposition of withholding taxes. Foreign financial markets may have less volume and
longer settlement periods than U.S. markets which may cause liquidity problems for a Series. In addition, costs associated with transactions on foreign markets are generally higher than for transactions in the U.S. These risks generally are greater
for investments in securities of companies in emerging markets, which are usually in the initial stages of their industrialization cycle.
Obligations of foreign governmental entities are subject to various types of governmental support and may or may not be supported by the full faith and
credit of a foreign government. A Series’ investments in emerging markets can be considered speculative, and therefore may offer greater potential for gains and losses than investments in developed markets of the world. Investing in emerging
market countries may entail purchasing securities issued by or on behalf of entities that are insolvent, bankrupt, in default or otherwise engaged in an attempt to reorganize or reschedule their obligations, and in entities that have little or no
proven credit rating or credit history. With respect to any emerging country, there may be a greater potential for nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic
developments (including war) which could affect adversely the economies of such countries or investments in such countries. Foreign ownership limitations also may be imposed by the charters of individual companies in emerging market countries to
prevent, among other concerns, violation of foreign investment limitations. The economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade
barriers, exchange or currency controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also may have been, and may continue to be,
adversely affected by economic conditions in the countries with which they trade.
Currency Risks
. The U.S. dollar value of securities
denominated in a foreign currency will vary with changes in currency exchange rates, which can be volatile. Accordingly, changes in the value of the currency in which a Series’ investments are denominated relative to the U.S. dollar will affect
the Series’ net asset value (“NAV”). Exchange rates are generally affected by the forces of supply and demand in the international currency markets, the relative merits of investing in different countries and the intervention or
failure to intervene of U.S. or foreign governments and central banks. However, currency exchange rates may fluctuate based on factors intrinsic to a country’s economy. Some emerging market countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, emerging markets are subject to the risk of restrictions upon the free conversion of their currencies into other currencies. Any devaluations relative to the U.S. dollar in the currencies in
which a Series’ securities are quoted would reduce the Series’ NAV per share.
Repurchase Agreements
. Each Series may enter
into repurchase agreements with respect to portfolio securities. Under the terms of a repurchase agreement, a Series purchases securities (“collateral”) from various financial institutions such as a bank or broker-dealer (a
“seller”) which the Advisor deems to be creditworthy, subject to the seller’s agreement to repurchase them at a mutually agreed upon date and price. The repurchase price generally equals the price paid by the Series plus interest
negotiated on the basis of current short-term rates (which may be more or less than the rate on the underlying portfolio securities).
The
seller under a repurchase agreement is required to maintain the value of the collateral held pursuant to the agreement at not less than 100% of the repurchase price, and securities subject to repurchase agreements are held by the Series’
custodian either directly or through a securities depository. Default by the seller would, however, expose the Series to possible loss because of adverse market action or delay in connection with the disposition of the underlying securities.
Investment Companies
. Investment company securities are securities of other open-end or closed-end investment companies or unit
investment trusts. The Series may invest in securities of open-end investment companies, including exchange-traded funds (“ETFs”) organized as open-end investment companies, closed-end investment companies or unit investment trusts,
including ETFs organized as unit investment trusts.
The 1940 Act prohibits, subject to certain exceptions, an investment company from
acquiring more than 3% of the outstanding voting shares of an investment company and limits such investments to no more than 5% of a Series’ total assets in any one investment company and no more than 10% in any combination of investment
companies. These limitations do not apply to a Series’ investment in money market funds. A Series may invest in investment companies managed by the Advisor or its affiliates to the extent permitted under the 1940 Act or as otherwise authorized
by rule, regulation or order of the SEC.
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To the extent a Series invests a portion of its assets in investment companies, those assets will be subject
to the risks of the purchased investment company’s portfolio securities. The Series also will bear its proportionate share of the expenses of the purchased investment company in addition to its own expenses. With the exception of the
Series’ investments in money market funds, the Series do not intend to invest in other investment companies, unless, in the judgment of the Advisor, the potential benefits of such investments exceed the associated costs (which includes any
investment advisory fees charged by the investment companies) relative to the benefits and costs associated with direct investments in the underlying securities. Because of restrictions on direct investment by U.S. entities in certain countries,
investment in other investment companies may be the most practical or the only manner in which an international and global fund can invest in the securities markets of those countries.
Investments in closed-end investment companies may involve the payment of substantial premiums above the NAV of such issuer’s portfolio securities and are subject to limitations under the 1940 Act. A
Series also may incur tax liability to the extent it invests in the stock of a foreign issuer that constitutes a “passive foreign investment company.”
ETFs are investment companies that are registered under the 1940 Act as open-end funds or unit investment trusts (“UITs”). ETFs are actively traded on national securities exchanges and are
generally based on specific domestic and foreign market indices. An “index based ETF” seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in
the index. Because ETFs are based on an underlying basket of stocks or an index, they are subject to the same market fluctuations as these types of securities in volatile market swings.
Each Series may invest in iShares Funds, which are ETFs issued by iShares Trust and iShares, Inc. Pursuant to an exemptive order issued to iShares and procedures adopted by the Fund’s Board of
Directors, the Series may invest in an iShares Fund beyond the limits set forth in section 12(d)(1)(A) of the 1940 Act, subject to certain terms and conditions. iShares is a registered trademark of BlackRock Fund Advisors (“BFA”). Neither
BFA nor the iShares Funds make any representations regarding the advisability of investing in a Series.
Securities Lending
. Each
Series may lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Directors. These loans, if and when made, may not
exceed 33 1/3% of a Series’ total assets taken at value (including the loan collateral). A Series will not lend portfolio securities to its investment advisor or its affiliates unless it has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be fully collateralized by cash, letters of credit or U.S. Government Securities, and the collateral will be maintained in an amount equal to at least 100% of the current market value of the loaned
securities by marking to market daily. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Series.
By lending its securities, a Series may increase its income by either investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S.
Government Securities or letters of credit are used as collateral. A Series may pay a part of the income earned to a third party (such as the Fund’s custodian) for acting as the Series’ securities lending agent. A Series will adhere to the
following conditions whenever its portfolio securities are loaned: (i) the Series must receive at least 100% cash collateral or equivalent securities of the type discussed in the preceding paragraph from the borrower; (ii) the borrower
must increase such collateral whenever the market value of the securities rises above the level of such collateral; (iii) the Series must be able to terminate the loan on demand; (iv) the Series must receive reasonable interest on the
loan, in addition to payments reflecting the amount of any dividends, interest or other distributions on the loaned securities; (v) the Series may pay only reasonable fees in connection with the loan; and, (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment occurs, the Series must terminate the loan and regain the right to vote the securities. Loans may involve certain risks in the event
of default or insolvency of the borrower, including possible delays or restrictions upon the Series’ ability to recover the loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market
action, expenses and/or delays.
Investment in Illiquid and Restricted Securities
. The Series may not purchase illiquid securities,
i.e., securities that cannot be disposed of at approximately the amount at which the Series has valued them in seven days or less (which term includes repurchase agreements and time deposits maturing in more than seven days) if, in the aggregate,
more than 15% of its net assets would be invested in illiquid securities.
Restricted securities are securities which were originally sold in
private placements and which have not been registered under the Securities Act of 1933, as amended (the “1933 Act”). Such securities generally have been considered illiquid because they may be resold only subject to statutory restrictions
and delays or if registered under the 1933 Act. The SEC adopted Rule 144A to provide for a safe harbor exemption from the registration requirements of the 1933 Act for resales of restricted securities to “qualified institutional buyers.”
The result has been the development of a more liquid and efficient institutional resale market for restricted securities. Rule 144A securities may be liquid if properly determined by the Advisor pursuant to procedures adopted by the Board of
Directors.
15
Investment Restrictions
Each Series has adopted certain restrictions set forth below as fundamental policies, which may not be changed without the favorable vote of the holders
of a “majority” of the Series’ outstanding voting securities, which means a vote of the holders of the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares.
Except for the limitation on borrowings, or as may be specifically provided to the
contrary, all of the below percentage limitations are applicable at the time of purchase. With respect to warrants, rights, and convertible securities, a determination of compliance with the above limitations shall be made as though such warrant,
right, or conversion privilege had been exercised. With respect to the limitation on illiquid securities, in the event that a subsequent change in net assets or other circumstances causes a Series to exceed its limitation, the Series will take steps
to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable.
None of the Series may:
1. Purchase securities of an issuer, except as consistent with the maintenance of its status as an open-end diversified company under the
1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
2. Borrow money, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended from time to time.
3. Purchase any securities which would cause more than 25% of the total assets of the Series, based on current value at the time of such
purchase, to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in (a) obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities, or (b) tax-exempt obligations of state or municipal governments and their political subdivisions;
4. Make loans, except that each Series may (a) purchase or hold debt instruments in accordance with its investment objective and policies, (b) enter into repurchase agreements, and (c) loan
its portfolio securities, to the fullest extent permitted under the 1940 Act,and any rules, regulation or order thereunder;
5. Issue senior
securities (as defined in the 1940 Act) except in connection with permitted borrowings as described in the Series’ SAI or as permitted by the 1940 Act, and any rule, regulation, or order of the SEC thereunder;
6. Purchase or sell physical commodities or commodity contracts based on physical commodities or invest in unmarketable interests in real estate limited
partnerships or invest directly in real estate. For the avoidance of doubt, the foregoing policy does not prevent a Series from, among other things, (i) purchasing marketable securities of companies that deal in real estate or interests therein
(including REITs); (ii) purchasing marketable securities of companies that deal in physical commodities or interests therein; and (iii) purchasing, selling and entering into futures contracts (including futures contracts on indices of
securities, interest rates and currencies), options on futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments; and
7. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a
portfolio security.
The following non-fundamental investment policies and restrictions apply to each Series. They may be changed by the
Fund’s Board of Directors.
1.None of the Series may invest in illiquid securities, i.e., securities that cannot be disposed of at
approximately the amount at which the Series has valued them in seven days or less (which term includes repurchase agreements and time deposits maturing in more than seven days) if, in the aggregate, more than 15% of its net assets would be invested
in illiquid securities;
2.None of the Series may purchase securities on margin, except that the Series may obtain short-term credits that are
necessary for the clearance of transactions, and provided that margin payments in connection with futures contracts and options on futures contracts shall not constitute purchasing securities on margin.
The following descriptions of the 1940 Act may assist investors in understanding the above policies and restrictions.
16
Borrowing
. The 1940 Act restricts an investment company from borrowing (including pledging,
mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets (including the amount borrowed, but excluding temporary borrowings not in excess of 5% of its total assets). Transactions that are fully collateralized in a manner that
does not involve the prohibited issuance of a “senior security” within the meaning of Section 18(f) of the 1940 Act, shall not be regarded as borrowings for the purposes of a Series’ investment restriction.
Concentration
. The SEC has defined concentration as investing 25% or more of an investment company’s total assets in an industry or group of
industries, with certain exceptions.
Diversification
. Under the 1940 Act and the rules, regulations and interpretations thereunder, a
“diversified company,” as to 75% of its total assets, may not purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. Government or its agencies, or instrumentalities or securities of other investment
companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer’s voting securities would be held by the investment company.
Lending
. Under the 1940 Act, an investment company may only make loans if expressly permitted by its investment policies.
Senior Securities
. Senior securities may include any obligation or instrument issued by an investment company evidencing indebtedness. The 1940
Act generally prohibits each Series from issuing senior securities, although it provides allowances for certain borrowings and certain other investments, such as short sales, reverse repurchase agreements, firm commitment agreements and standby
commitments, when such investments are “covered” or with appropriate earmarking or segregation of assets to cover such obligations.
Underwriting
. Under the 1940 Act, underwriting securities involves an investment company purchasing securities directly from an issuer for the
purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets. The foregoing
restrictions do not apply to non-diversified funds.
Portfolio Turnover
An annual portfolio turnover rate is, in general, the percentage computed by taking the lesser of purchases or sales of portfolio securities (excluding
certain debt securities) for a year and dividing that amount by the monthly average of the market value of such securities during the year. Under normal market conditions, each Series expects that its long-term average annual turnover rate will be
less than 100%. However, turnover will in fact be determined by market conditions and opportunities, and therefore it is impossible to estimate the annual turnover rate with confidence. Higher portfolio turnover (e.g., over 100%) necessarily will
cause the Series to pay correspondingly increased brokerage and trading costs. In addition to the transaction costs, higher portfolio turnover may result in the realization of capital gains. As discussed under Federal Tax Treatment of Dividends and
Distributions, to the extent net short-term gains are realized, any distributions resulting from such gains are considered ordinary income for federal income tax purposes.
Disclosure of Portfolio Holdings
The Fund’s Board of
Directors has approved a portfolio holdings disclosure policy that governs the timing and circumstances of disclosure to shareholders and third parties of information regarding the portfolio investments held by the Series.
Disclosure of the Series’ complete portfolio holdings is required to be made quarterly within 60 days of the end of each fiscal quarter (currently,
each January 31, April 30, July 31, and October 31), in the Annual Report and Semi-Annual Report to shareholders and in the quarterly holdings reports filed with the SEC on Form N-Q. Each Series’ Annual and
Semi-Annual Reports are distributed to shareholders and the most recent Reports are available on the Fund’s website (see address below). The Series’ holdings reports on Form N-Q are available, free of charge, on the EDGAR database on the
SEC’s website at
www.sec.gov
. In addition, each Series’ month-end and quarter-end complete portfolio holdings are available on the Fund’s website at www.manning-napier.com. This information is provided with a lag of at least
eight days. The information provided will include the following for each security in the portfolio: security name, CUSIP or Sedol symbol, ticker (for equities only), country, number of shares or units held (for equities), par value (for bonds), and
market value as of the date of the portfolio. Portfolio holdings information will be available on the website at least until it is superseded by a quarterly portfolio holdings report distributed to shareholders (with respect to Annual and Semi-
Annual Reports) or filed with the SEC (with respect to a Form N-Q). This information is publicly available to all categories of persons.
The
Fund provides portfolio holdings and information derived from the portfolio holdings to rating and ranking organizations such as Lipper and Morningstar, Inc. in connection with rating the Series and mutual fund database services such as Thomson
Financial Research in connection with their collection of fund data for their subscribers. The Fund will only disclose such information as of the
17
end of the most recent calendar month, and this information will be provided to these organizations no sooner than the next day after it is posted on the Fund’s website, unless the
conditions described below relating to the disclosure of non-public portfolio holdings information are satisfied. The Fund believes that these organizations have legitimate objectives in requesting such portfolio holdings information.
The Fund’s policies and procedures provide that the Fund’s Chief Compliance Officer (or her designee) (“CCO”) may authorize
disclosure of non-public portfolio holdings to rating and ranking organizations, mutual fund databases, consultants, and other organizations that will use the data for due diligence, rating, or ranking the Series, or similar uses at differing times
and/or with different lag times than those described above. Prior to making any disclosure of non-public portfolio holdings to a third party, the CCO must determine that such disclosure serves a reasonable business purpose, is in the best interests
of the Fund’s shareholders and that conflicts between the interests of the Fund’s shareholders and those of the Fund’s Advisor, principal underwriter, or any affiliated person of the Fund are addressed.
The Fund’s policies and procedures also permit the Fund to disclose certain commentary and analytical, statistical, performance or similar
information relating to a Series of the Fund or its portfolio holdings if certain conditions are met. The information must be for legitimate business purposes and must be deemed to be non-material non-public information based on a good faith review
of the particular facts and circumstances. Examples of such non-material non-public information may include, but are not limited to, the following types of information: allocation of a Series’ portfolio securities and other investments among
various asset classes, sectors, industries, market capitalizations, countries and regions; the characteristics of the stock components and other investments of a Series; the attribution of a Series’ returns by asset class, sector, industry,
market capitalization, country and region; certain volatility characteristics of a Series; certain valuation metrics of a Series (such as average price to earnings ratio and average earnings growth); and maturity and credit quality statistics for a
Series’ fixed income holdings.
The Fund requires any third party receiving non-public portfolio holdings or information which is derived
from portfolio holdings that is deemed material (together, “portfolio holdings data”) to enter into a confidentiality agreement with the Fund which provides, among other things, that non-public portfolio holdings data will be kept
confidential and that the recipient has a duty not to trade on the portfolio holdings data and will use such information solely to analyze and rank a Series, or to perform due diligence and asset allocation, depending on the recipient of the
information. The agreement will require that the recipient provide, upon request, evidence reasonably satisfactory to the Fund to demonstrate its adherence to the provisions of the agreement. The Board of Directors will be informed of any such
disclosures at its next regularly scheduled meeting or as soon as is reasonably practicable.
The Fund does not receive any compensation or
other consideration for disclosure of portfolio holdings information.
In addition, the Fund’s service providers, such as the Advisor,
Custodian, Counsel (MLB), PwC, Distributor, and BNY Mellon, all as defined herein, may possess or receive daily portfolio holdings information with no lag time in connection with their services to the Fund. In addition, proxy voting service
providers (See Appendix C) may receive portfolio holdings information with no lag time, as necessary, in connection with their services to the Fund. Service providers will be subject to a duty of confidentiality with respect to any portfolio
holdings information, whether imposed by the provisions of the service provider’s contract with the Fund or by the nature of its relationship with the Fund.
18
Management
The overall business and affairs of the Fund are managed by the Fund’s Board of Directors. The Board approves all significant agreements between the Fund and persons or companies furnishing services
to the Fund, including the Fund’s agreements with its investment advisor, custodian and distributor. The day-to-day operations of the Fund are delegated to the Fund’s officers and to the Advisor and other service providers.
The following chart shows certain information about the Fund’s officers and directors, including their principal occupations during the last five
years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years. Manning & Napier Advisors, LLC is the successor entity to Manning & Napier Advisors, Inc. Accordingly, for
purposes of the charts below, an individual’s employment history at Manning & Napier Advisors, LLC includes his/her employment history at Manning &Napier Advisors, Inc., except as otherwise stated.
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Interested Director and Officer
|
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|
|
|
|
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Name:
|
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B. Reuben Auspitz
*
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|
|
|
|
Address:
|
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290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
65
|
|
|
|
|
Current Position(s) Held with Fund:
|
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Principal Executive Officer,
President, Chairman, Director
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Indefinite – Director since 1984. Principal Executive Officer since 2002, President since 2004
1
, Vice President 1984-2003.
|
|
|
|
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Principal Occupation(s) During Past 5 Years:
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Executive Vice President; Chief Compliance Officer since 2004; Vice Chairman since June 2010; Co-Executive Director from 2003 -2010 – Manning & Napier Advisors, LLC.
President; Director – Manning & Napier Investor Services, Inc.
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|
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Holds or has held one or more of the following titles for various subsidiaries and affiliates; President, Vice President, Director, Chairman, Chief Compliance Officer or
Member
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|
|
|
Number of Portfolios Overseen within Fund Complex:
|
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41
|
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|
|
|
Other Directorships Held Outside Fund Complex During Past 5 Years:
|
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N/A
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|
|
|
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Independent Directors
|
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|
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Name:
|
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Harris H. Rusitzky
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|
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Address:
|
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290 Woodcliff Drive
Fairport,
NY 14450
|
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|
|
|
Age:
|
|
78
|
|
|
|
|
Current Position(s) Held with Fund:
|
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Director, Audit Committee Member, Governance & Nominating Committee Member
|
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|
|
|
Term of Office & Length of Time Served:
|
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Indefinite – Since 1985
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
President – The Greening Group
(business consultants)
|
|
|
|
|
Number of Portfolios Overseen within Fund Complex:
|
|
41
|
|
|
|
|
Other Directorships Held Outside Fund Complex During Past 5 Years:
|
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N/A
|
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|
|
|
Name:
|
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Peter L. Faber
|
19
|
|
|
|
|
|
|
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Address:
|
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290 Woodcliff Drive
Fairport,
NY 14450
|
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|
|
|
Age:
|
|
74
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Director, Governance & Nominating Committee Member
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Indefinite – Since 1987
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Senior Counsel since (2006-2012), Partner (1995-2006 & 2013 – present) – McDermott, Will & Emery LLP
(law firm)
|
|
|
|
|
Number of Portfolios Overseen within Fund Complex:
|
|
41
|
|
|
|
|
Other Directorships Held Outside Fund Complex During Past 5 Years:
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Partnership for New York City, Inc. (non-profit) 1989-2010, New York Collegium (non-profit) 2004-2011, Boston Early Music Festival (non-profit)
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|
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Name:
|
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Stephen B. Ashley
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|
|
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Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
72
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Director, Audit Committee Member, Governance & Nominating Committee Member
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Indefinite – Since 1996
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Chairman, Director, President & Chief Executive Officer – The Ashley Group (property management and investment); Director (1995-2008) and Chairman (non-executive)
(2004-2008), Fannie Mae (mortgage)
|
|
|
|
|
Number of Portfolios Overseen within Fund Complex:
|
|
41
|
|
|
|
|
Other Directorships Held Outside Fund Complex During Past 5 Years:
|
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Fannie Mae (1995-2008), The Ashley Group (1995-2008), Genesee Corporation (1987-2007)
|
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|
|
|
Name:
|
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Paul A. Brooke
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
67
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Director, Audit Committee Member, Governance & Nominating Committee Member
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Indefinite – Since 2007
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
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Chairman & CEO (2005-2009) – Alsius Corporation (investments); Managing Member – PMSV Holdings LLC (investments) since 1991; Managing Member – Venbio
(investments) since 2010.
|
|
|
|
|
Number of Portfolios Overseen within Fund Complex:
|
|
41
|
|
|
|
|
Other Directorships Held Outside Fund Complex During Past 5 Years:
|
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Incyte Corporation (2000-present), ViroPharma, Inc. (2000-present), WebMD (2000-2010); MPM Bio-equities (2000-2009); Cheyne Capital International (2000-present); GMP Companies
(2000-2012); HoustonPharma (2000-2009)
|
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|
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Name:
|
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Chester N. Watson
|
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|
|
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Address:
|
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290 Woodcliff Dr.
|
|
|
|
|
|
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Fairport, NY 14450
|
|
|
|
|
Age:
|
|
62
|
20
|
|
|
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Director, Audit Committee Member, Governance & Nominating Committee Member
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Indefinite – Since 2012
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
General Auditor (2003 – 2011) – General Motors Company (auto manufacturer)
|
|
|
|
|
Number of Portfolios Overseen within Fund Complex:
|
|
41
|
|
|
|
|
Other Directorships Held Outside Fund Complex
During the Past 5 Years:
|
|
N/A
|
|
|
|
|
Officers
|
|
|
|
|
|
|
Name:
|
|
Ryan Albano
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
31
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Assistant Chief Financial Officer
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Since 2001
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Fund Reporting Manager since 2001 – Manning & Napier Advisors, LLC; Manager (2004-2011) – KPMG LLP
|
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|
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Name:
|
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Jeffrey S. Coons, Ph.D., CFA
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
49
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Vice President
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Since 2004
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
President since 2010 and Co-Director of Research since 2002 – Manning & Napier Advisors, LLC
|
|
|
|
|
|
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Holds one or more of the following titles for various subsidiaries and affiliates of Manning & Napier Advisors, LLC: President, Director, Treasurer, or Senior Trust
Officer
|
|
|
|
|
Name:
|
|
Elizabeth Craig
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
26
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Assistant Corporate Secretary
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Since 2011
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Mutual Fund Compliance Specialist since 2009 – Manning & Napier Advisors, LLC
|
|
|
|
|
Name:
|
|
Christine Glavin
|
21
|
|
|
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
46
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Principal Financial Officer, Chief Compliance Officer
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Principal Financial Officer since 2002; Chief Financial Officer since 2001
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Director of Fund Reporting since 2011; Fund Reporting Manager (1997-2011) – Manning & Napier Advisors, LLC; Assistant Treasurer since 2008 – Exeter Trust
Company
|
|
|
|
|
Name:
|
|
Jodi L. Hedberg
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
45
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering (AML) Compliance Officer
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Corporate Secretary since 1997; Chief Compliance Officer since 2004; Anti-Money Laundering Officer since 2002
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Director of Compliance (previously titled Compliance Manager) – Manning & Napier Advisors, LLC and affiliates since 1995 (joined Manning & Napier Advisors, LLC in
1990); Corporate Secretary, Manning & Napier Investor Services, Inc. since 2006
|
|
|
|
|
Name:
|
|
Richard Yates
|
|
|
|
|
Address:
|
|
290 Woodcliff Drive
Fairport,
NY 14450
|
|
|
|
|
Age:
|
|
47
|
|
|
|
|
Current Position(s) Held with Fund:
|
|
Chief Legal Officer
|
|
|
|
|
Term of Office & Length of Time Served:
|
|
Chief Legal Officer since 2004
1
|
|
|
|
|
Principal Occupation(s) During Past 5 Years:
|
|
Counsel – Manning & Napier Advisors, LLC and affiliates since 2000
|
|
|
|
|
|
|
Holds one or more of the following titles for various affiliates; Chief Legal Officer, Director or Corporate Secretary
|
|
*
|
Interested Director, within the meaning of the 1940 Act by reason of his position with the Fund’s investment advisor and distributor.
Mr. Auspitz serves as Executive Vice President and Vice Chairman, Manning & Napier Advisors, LLC and President and Director, Manning & Napier Investor Services, Inc., the Fund’s distributor.
|
|
1
|
The term of office of all officers shall be one year and until their respective successors are chosen and qualified, or his or her earlier resignation
or removal as provided in the Fund’s By-Laws.
|
Equity Ownership of Directors as of 12/31/12
22
|
|
|
|
|
|
|
Name of Directors
|
|
Dollar Ranger of Equity Securities in the
Series
covered by this SAI
|
|
Aggregate Dollar Range of Equity
Securities in All Registered Investment
Companies Overseen by Director in
Family of Investment Companies
|
|
Harris H. Rusitzky
|
|
None
|
|
Over $100,000
|
|
Peter L. Faber
|
|
None
|
|
Over $100,000
|
|
Stephen B. Ashley
|
|
None
|
|
Over $100,000
|
|
Paul A. Brooke
|
|
None
|
|
None
|
|
Chester N. Watson
|
|
None
|
|
None
|
|
|
|
|
|
Interested Director
|
|
|
|
|
|
Reuben Auspitz
|
|
None
|
|
Over $100,000
|
None of the Independent Directors have any beneficial ownership interest in the Fund’s Advisor,
Manning & Napier Advisors, LLC or its Distributor, Manning & Napier Investor Services, Inc.
Board Responsibilities.
The management and affairs of the Fund and the Series are supervised by the Directors under the laws of the State of Maryland. The Board of Directors is responsible for overseeing the Fund and each of the Fund’s additional other series, which
include Series not described in this SAI. The Board has approved contracts, as described herein, under which certain companies provide essential management services to the Fund.
As with most mutual funds, the day-to-day business of the Fund, including the management of risk, is performed by third party service providers, such as the Advisor and Distributor. The Directors are
responsible for overseeing the Fund’s service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Each service provider is responsible for one or more discrete aspects of the
Fund’s business (e.g., the Advisor is responsible for the day-to-day management of the Fund’s portfolio investments) and, consequently, for managing the risks associated with that business.
The Directors’ role in risk oversight begins before the inception of a Series, at which time the Advisor presents the Board with information
concerning the investment objectives, strategies and risks of the Series as well as proposed investment limitations for the Series. Additionally, the Advisor provides the Board with an overview of, among other things, its investment philosophy,
brokerage practices and compliance infrastructure. Thereafter, the Board continues its oversight function with respect to the Fund by monitoring risks identified during regular and special reports made to the Board, as well as regular and special
reports made to the Audit Committee. In addition to monitoring such risks, the Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the Fund may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the Fund by the Advisor and receives information about
those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether to renew the Advisory Agreement with the Advisor, the Board meets with the Advisor to review such services. Among other things,
the Board regularly considers the Advisor’s adherence to the Series’ investment restrictions and compliance with various Fund policies and procedures and with applicable securities regulations. The Board also reviews information about the
Series’ investments, including, for example, portfolio holdings schedules and reports on the Advisor’s use of derivatives and illiquid securities in managing the Funds.
The Board meets regularly with the Fund’s CCO to review and discuss compliance issues and Fund and Advisor risk assessments. At least annually, the Fund’s CCO provides the Board with an
assessment of the Fund’s Compliance Program reviewing the adequacy and effectiveness of the Fund’s policies and procedures and those of its service providers, including the Advisor. The assessment addresses the operation of the policies
and procedures of the Fund and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies and procedures;
and any material compliance matters since the date of the last report.
The Board receives reports from the Fund’s service providers
regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Fund’s Fair Value Committee makes regular reports to the Board concerning investments for which market quotations are not readily
available. Annually, the independent registered public accounting firm reviews with the Audit Committee its audit of the Fund’s financial statements, focusing on major areas of risk encountered by the Fund and noting any significant
deficiencies or material weaknesses in the Fund’s internal controls. Additionally, in connection with its oversight function, the Board oversees Fund management’s implementation of disclosure controls and procedures, which are designed to
ensure that information required to be disclosed by the Fund in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods, and the Fund’s internal controls over financial reporting,
which comprise policies and procedures designed to provide reasonable assurance regarding the reliability of the Fund’s financial reporting and the preparation of the Fund’s financial statements.
23
From their review of these reports and discussions with the Advisor, the CCO, the independent registered
public accounting firm and other service providers, the Board and the Audit Committee learn in detail about the material risks of the Fund and the Series, thereby facilitating a dialogue about how management and service providers identify and
mitigate those risks.
The Chairman of the Board, B. Reuben Auspitz, is an interested person of the Fund as that term is defined in the 1940
Act. The Fund does not have a single lead Independent Director. The Fund has determined its leadership structure is appropriate given the specific characteristics and circumstances of the Fund. The Fund made this determination in consideration of,
among other things, the fact that the Directors who are not interested persons of the Fund (i.e., “Independent Directors”) constitute a super-majority (at least 75%) of the Board, the fact that the members of each Committee of the Board
are independent Directors, the amount of assets under management in the Fund, the number of Series (and classes of shares) overseen by the Board, and the total number of Directors on the Board.
Individual Director Qualifications
The
Fund has concluded that each of the Directors should serve on the Board because of their ability to review and understand information about the Series provided to them by management, to identify and request other information they may deem relevant
to the performance of their duties, to question management and other service providers regarding material factors bearing on the management and administration of the Series, and to exercise their business judgment in a manner that serves the best
interests of the Fund’s shareholders. The Fund has concluded that each of the Directors should serve as a Director based on their own experience, qualifications, attributes and skills as described below.
The Fund has concluded that B. Reuben Auspitz should serve as Director because of his knowledge of and experience in the financial services industry and
the experience he has gained as a Director of the Fund since 1984. Mr. Auspitz has been with the Advisor since 1983, and has served in a number of senior roles with the Advisor and its affiliates during that time encompassing the Fund’s
distributor, advisory services, asset custody, product development, and securities research. Prior to joining the Advisor, Mr. Auspitz worked for Manufacturers Hanover and Citibank as a healthcare securities analyst and reported directly into
the executive suites of Pfizer and Squibb with an array of responsibilities in finance.
The Fund has concluded that Stephen Ashley should
serve as Director because of the experience he has gained in his various roles with the Ashley Group, a property management company, his experience as Chairman and Director of a publicly traded company, his knowledge of and experience in the
financial services industry, and the experience he has gained serving as Director of the Fund since 1996.
The Fund has concluded that Peter
Faber should serve as Director because of the experience he gained serving as a Partner and Senior Counsel in the tax practice of a large, international law firm, McDermott, Will & Emery LLP, his experience in and knowledge of the financial
services industry, and the experience he has gained serving as Director of the Fund since 1987.
The Fund has concluded that Harris Rusitzky
should serve as Director because of the business experience he gained as founding President of the Rochester Funds, as President of a consulting company, The Greening Group, as a Partner of The Restaurant Group, his knowledge of the financial
services industry, and the experience he has gained serving as Director of the Fund since 1985.
The Fund has concluded that Paul Brooke
should serve as Director because of the business experience he has gained in a variety of roles with different financial and health care related businesses. Mr. Brooke has served as Chairman and CEO of Ithaka Acquisition Corp., and following
its merger with a medical device company, the Alsius Corporation, Mr. Brooke served as Chairman. As a Partner of Morgan Stanley, Mr. Brooke was responsible for global research and health care strategy. Mr. Brooke was also responsible
for health care investments at Tiger Management, LLC and serves as the Managing Member for a private investment firm, PMSV Holdings, LLC. The Fund has concluded that Mr. Brooke should serve as a Director also because of his knowledge of the
financial services industry, and the experience he has gained serving as Director of the Fund since 2007.
The Fund has concluded that Chester
Watson should serve as Director because of the business experience he has gained as the Chief Audit Executive of General Motors Company, Lucent Technologies, and Verizon Communications (formerly Bell Atlantic Corporation) and as an Audit Partner in
two major accounting firms, as well as his experience as a member of the Board of Trustees of Rochester Institute of Technology, where he serves as Chairman of the Finance Committee and Member of the Audit Committee.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and experience of the individual
Directors primarily in the broader context of the Board’s overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the Fund. Moreover, references to
the qualifications, attributes and skills of Directors are pursuant to requirements of the SEC, do not constitute holding out of the Board or any Director as having any special expertise or experience, and shall not be deemed to impose any greater
responsibility or liability on any such person or on the Board by reason thereof.
24
Board Committees
There are two Committees of the Fund’s Board of Directors: the Audit Committee and the Governance and Nominating Committee.
The Audit Committee members are Harris H. Rusitzky, Stephen B. Ashley, Paul A. Brooke, and Chester N. Watson. The Audit Committee meets twice annually, and, if necessary, more frequently. The Committee
met two times during the last fiscal year. The Audit Committee reviews the financial reporting process, the system of internal control, the audit process, and the Fund’s process for monitoring compliance with investment restrictions and
applicable laws and regulations.
The Governance and Nominating Committee members are Stephen B. Ashley, Peter L. Faber, Harris H.
Rusitzky, Paul A. Brooke, and Chester N. Watson. The Governance and Nominating Committee meets on an annual basis, and, if necessary, more frequently. The Governance and Nominating Committee evaluates candidates’ qualifications for Board
membership and the independence of such candidates from the investment advisor and other principal service providers for the Fund; makes recommendations to the full Board for nomination for membership on any committees of the Board; reviews as
necessary the responsibilities of any committees of the Board and whether there is a continuing need for each committee; evaluates whether there is a need for additional committees of the Board; evaluates whether committees should be combined or
reorganized; and reviews the performance of all Board members. The Governance and Nominating Committee’s procedures for the consideration of candidates for Board membership submitted by shareholders are attached as Appendix B. The Governance
and Nominating Committee met twice during the last fiscal year.
The Interested Director and the officers of the Fund do not receive
compensation from the Fund, except that a portion of the Fund’s Chief Compliance Officer’s salary is paid by the Fund. Each Independent Director receives an annual fee of $50,000. Annual fees will be calculated quarterly. Each Independent
Director receives $7,500 per Board Meeting attended. In addition, the Independent Directors who are members of the Audit Committee receive $3,000 per Committee meeting attended, and the Independent Directors who are members of the Governance and
Nominating Committee receive $2,000 per Committee meeting attended.
Compensation Table for Fiscal Year Ended October 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Position
with
Registrant
|
|
Aggregate
Compensation
from Fund
|
|
|
Pension
|
|
Estimated
Benefits upon
Retirement
|
|
Total Compensation
from Fund and
Fund Complex*
|
|
|
Jodi Hedberg
|
|
Chief Compliance Officer
|
|
$
|
77,958
|
|
|
N/A
|
|
N/A
|
|
$
|
77,958
|
|
|
Harris H. Rusitzky
|
|
Director
|
|
$
|
90,000
|
|
|
N/A
|
|
N/A
|
|
$
|
90,000
|
|
|
Peter L. Faber
|
|
Director
|
|
$
|
84,000
|
|
|
N/A
|
|
N/A
|
|
$
|
84,000
|
|
|
Stephen B. Ashley
|
|
Director
|
|
$
|
90,000
|
|
|
N/A
|
|
N/A
|
|
$
|
90,000
|
|
|
Paul A. Brooke
|
|
Director
|
|
$
|
90,000
|
|
|
N/A
|
|
N/A
|
|
$
|
90,000
|
|
|
Chester N. Watson
1
|
|
Director
|
|
$
|
18,875
|
|
|
N/A
|
|
N/A
|
|
$
|
18,875
|
|
|
*
|
As of October 31, 2012, the Fund Complex consisted of 41 Series.
|
|
1
|
Mr. Watson was appointed to the Board effective August 22, 2012.
|
As of February 15, 2013, the directors and officers of the Fund, as a group, owned less than 1% of the Fund.
Code of Ethics
The Board of Directors of the Fund, the Advisor, and the Fund’s
principal underwriter have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. This Code of Ethics applies to the personal investing activities of directors, officers and certain employees (“access persons”). Rule 17j-1 and
the Code are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under this Code of Ethics, access persons are permitted to engage in personal securities transactions, but are required to
report their personal securities transactions for monitoring purposes. In addition, certain access persons are required to obtain approval before investing in initial public offerings or private placements. A copy of this Code of Ethics is on file
with the SEC, and is available to the public.
25
Proxy Voting Policy
The Board of Directors has delegated proxy voting responsibilities with respect to securities held by the Series to the Advisor, subject to the Board’s general oversight. The Advisor has adopted its
own proxy voting policies and procedures for this purpose (the “Procedures”), which are attached to this SAI as Appendix C. The Procedures may be changed as necessary to remain current with regulatory requirements and internal policies and
procedures.
The Fund is required to disclose annually the Fund’s complete proxy voting record on Form N-PX. The Fund’s proxy voting
record for the most recent 12 month period ended June 30th is available upon request by calling 1-800-466-3863 or by writing to the Fund at Manning & Napier Fund, Inc., P.O. Box 805, Fairport, NY 14450. The Fund’s Form N-PX will
also be available on the SEC’s website at
www.sec.gov
.
BENEFICIAL OWNERS
As of the date of this SAI, no person or entities owned, of record or beneficially, more than 5% of the Series’ shares.
The Advisor
Manning & Napier Advisors, LLC (“MNA” or the “Advisor”), acts as the Fund’s investment advisor. Manning &
Napier Group, LLC (“Manning & Napier Group”) owns 100% of the outstanding interests in MNA and acts as the sole managing member of MNA. Manning & Napier Inc., a publicly traded company (ticker symbol “MN”), acts
as the sole managing member of Manning &Napier Group. Mr. William Manning controls Manning & Napier, Inc. by virtue of his majority ownership of its voting securities and, therefore, also controls Manning & Napier Group
and MNA. The Advisor is generally responsible for supervision of the overall business affairs of the Fund including supervision of service providers to the Fund and direction of the Advisor’s directors, officers or employees who may be elected
as officers of the Fund to serve as such.
The Fund pays the Advisor for the services performed a fee at the annual rate of 0.45% of the
Series’ average daily net assets for each Series. As described below, the Advisor is separately compensated for acting as transfer agent and accounting services agent for the Series.
Under the Investment Advisory Agreement (the “Agreement”) between the Fund and the Advisor, the Fund is responsible for its operating expenses, including: (i) interest and taxes;
(ii) brokerage commissions; (iii) insurance premiums; (iv) compensation and expenses of its Directors other than those affiliated with the Advisor; (v) legal and audit expenses; (vi) fees and expenses of the Fund’s
custodian, and accounting services agent, if obtained for the Fund from an entity other than the Advisor; (vii) expenses incidental to the issuance of its shares, including issuance on the payment of, or reinvestment of, dividends and capital
gain distributions; (viii) fees and expenses incidental to the registration under federal or state securities laws of the Fund or its shares; (ix) expenses of preparing, printing and mailing reports and notices and proxy material to
shareholders of the Fund; (x) all other expenses incidental to holding meetings of the Fund’s shareholders; (xi) dues or assessments of or contributions to the Investment Company Institute or any successor; and (xii) such
non-recurring expenses as may arise, including litigation affecting the Fund and the legal obligations with respect to which the Fund may have to indemnify its officers and directors.
Pursuant to a separate expense limitation agreement, the Advisor has contractually agreed to limit each class’s total direct annual operating expenses, exclusive of Shareholder Services Fees (as
defined below), as applicable, as shown below. The agreement will remain in effect until February 28, 2015, and may be extended.
|
|
|
|
|
|
|
Series
|
|
Contractual Expense Limitation
|
|
|
U. S. Dividend Focus Series Class S
|
|
|
0.60
|
%
|
|
U. S. Dividend Focus Series Class I
|
|
|
0.60
|
%
|
|
International Dividend Focus Series Class S
|
|
|
0.60
|
%
|
|
International Dividend Focus Series Class I
|
|
|
0.60
|
%
|
The Agreement provides that in the event the expenses of the Fund (including the fee of the Advisor but excluding:
(i) brokerage commissions; (ii) interest; (iii) taxes; and (iv) extraordinary expenses except for those incurred by the Fund as a result of litigation in connection with a suit involving a claim for recovery by the Fund, or as a
result of litigation involving a defense against a liability asserted against the Fund, provided that, if the Advisor made the decision or took the action which resulted in such claim the Advisor acted in good faith without gross negligence or
misconduct, and for any indemnification paid by the Fund to its officers, directors and advisors in accordance with applicable state and federal laws as a result of such litigation) for any fiscal year exceed the limits set by applicable regulations
of state securities commissions, the Advisor will reduce its fee by the amount of such excess. Any such reductions or refunds are accrued and paid in the same manner as the Advisor’s fee and are subject to readjustment during the year.
26
The Agreement states that the Advisor shall give the Fund the benefit of its best judgment and effort in
rendering services thereunder, but the Advisor shall not be liable for any loss sustained by reason of the purchase, sale or retention of any security, whether or not such purchase, sale or retention shall have been based upon its own investigation
and research or upon investigation and research made by any other individual, firm or corporation, if such purchase, sale or retention shall have been made and such other individual, firm or corporation shall have been selected in good faith. The
Agreement also states that nothing contained therein shall, however, be construed to protect the Advisor against any liability to the Fund or its security holders by reason of willful misfeasance, bad faith or gross negligence in the performance of
its duties, or by reason of its reckless disregard of its obligations and duties under the Agreement.
The Agreement also provides that it is
agreed that the Advisor shall have no responsibility or liability for the accuracy or completeness of the Fund’s Registration Statement under the 1940 Act or the 1933 Act except for information supplied by the Advisor for inclusion therein; the
Fund agrees to indemnify the Advisor to the full extent permitted by the Fund’s Articles of Incorporation.
The Advisor serves as the
Fund’s transfer agent and accounting services agent pursuant to a Master Services Agreement between the Fund and the Advisor. The Advisor has entered into agreements dated October 12, 2009 and November 9, 2009 with BNY Mellon, 4400
Computer Drive, Westborough, MA 01581, under which BNY Mellon serves as sub-accounting services agent and sub-transfer agent, respectively. Pursuant to the Master Services Agreement, as amended, the Fund pays the Advisor an annual fee of 0.0175% on
the first $3 billion of average net assets; 0.015% on the next $3 billion of average net assets; and 0.01% of the average net assets in excess of $6 billion; plus a base fee of $25,500 per Series. Additionally, certain transaction, account-based,
and cusip-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Effective October 1, 2012 and lasting until October 1, 2014, the Fund will receive a 10%
reduction of all fees, not to include out-of-pocket expenses or other agreed upon fees. The Series were not active prior to the date of this SAI, and therefore did not incur any fees for sub-accounting or sub-transfer agent services,
Distribution of Fund Shares
Manning & Napier Investor Services, Inc. (the “Distributor”) acts as Distributor of Fund shares and is located at the same address as the Advisor and the Fund. The Distributor and the
Fund are parties to a distribution agreement (the “Distribution Agreement”) which applies to each class of shares of the Fund.
The
Distribution Agreement is renewable annually. The continuation of the Distribution Agreement must be specifically approved by the Board of Directors and separately by the Directors who are not parties to the Distribution Agreement or
“interested persons” (as defined under the 1940 Act) of any party to the Distribution Agreement.
The Distributor will not receive
compensation for distribution of Class S or I shares of the Fund.
Class S Shareholder Services Plan (the “Plan”)
The Board of Directors of the Fund has adopted a Shareholder Services Plan with respect to Class S shares of the Series. The Plan enables the Fund to
directly or indirectly bear expenses relating to the provision by Service Organizations (as defined below) of certain service activities to the shareholders of Class S shares of the Series. Pursuant to the Plan, Class S shares of each of the Series
is subject to an annual shareholder services fee of up to 0.25% of the Class’s average daily net assets, respectively.
The Fund may use
payments under the Plan to enter into agreements with organizations, including affiliates of the Fund, such as the Advisor (referred to as “Service Organizations”), who will provide certain service activities for shareholders of the class,
including, but not limited to: (i) maintaining accounts relating to shareholders that invest in shares of the class; (ii) arranging for bank wires; (iii) responding to shareholder inquiries relating to the services performed by the
Service Organizations; (iv) responding to inquiries from shareholders concerning their investment in shares of the class; (v) assisting shareholders in changing dividend options, account designations and addresses; (vi) providing
information periodically to shareholders showing their position in shares of the class; (vii) forwarding shareholder communications from the Fund such as proxies, shareholder reports, annual reports, and dividend distribution and tax notices to
shareholders; (viii) processing purchase, exchange and redemption requests from shareholders and placing orders with the Fund or its service providers; and (ix) processing dividend payments from the Fund on behalf of shareholders. Service
Organizations may also use this fee for payments to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies and investment counselors, broker-dealers, mutual fund supermarkets and the Service
Organizations’ affiliates and subsidiaries as compensation for the services described above.
The Plan shall continue in effect for so
long as its continuance is specifically approved at least annually by votes of the majority of both (i) the Directors of the Fund and (ii) those Directors of the Fund who are not “interested persons” (as defined under the 1940
Act) of the Fund, and have no direct or indirect financial interest in the operation of the Plan or any agreements related to it (referred to as the “Qualified Directors”), cast in person at a Board of Directors meeting called for the
purpose of voting on the Plan. The Plan
27
requires that quarterly written reports of amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by the Directors. All material amendments to the Plan
must be approved by votes of the majority of both (i) the Directors of the Fund and (ii) the Qualified Directors.
No fees were paid
under the Class S Shareholder Services Plan for the Series for the fiscal year ended October 31, 2012.
The Distributor may from time to
time and from its own resources pay or allow additional discounts or promotional incentives in the form of cash or other compensation (including merchandise or travel) to financial intermediaries and it is free to make additional payments out of its
own assets to promote the sale of Fund shares. Similarly, the Advisor may, from its own resources, defray or absorb costs related to distribution, including compensation of employees who are involved in distribution. These payments or discounts may
be substantial but are paid or discounted by the Advisor or its affiliates, not by the Series or their shareholders.
Custodian, Independent Registered Public Accounting Firm, and Counsel
The custodian for the Fund is The Bank of New York Mellon (the
“Custodian”), 135 Santilli Highway, Everett, MA 02149. The Custodian holds cash, securities, and other assets of the Fund as required by the 1940 Act. The Custodian may, at its own expense, employ one or more sub-custodians on behalf of
the Fund, provided that it shall remain liable for all its duties as custodian. The foreign sub-custodians will act as custodian for the foreign securities held by the Fund.
PricewaterhouseCoopers LLP (“PwC”), with offices at 300 Madison Avenue, New York, NY 10017, serves as the independent registered public accounting firm for all the Series.
The Fund’s counsel is Morgan, Lewis & Bockius LLP (“MLB”), 1701 Market Street, Philadelphia, PA 19103.
Purchases and Redemptions
Check Acceptance Policy
. The Fund reserves the right to reject certain forms of payment for share purchases. The Fund maintains a check acceptance policy for share purchases. Investments that are
received in an unacceptable form will be returned. Checks must be made payable to the Manning & Napier Fund, Inc. and must be in U.S. dollars. The Fund will not accept cash, third party checks, starter checks, travelers checks, credit card
checks, or money orders. Investments that are received in an unacceptable form will be returned.
Investors Outside the U.S.
The
Fund does not generally accept investments by non-U.S. persons or U.S. persons living outside the U.S. Investments from U.S. persons living outside the U.S. may be accepted if the U.S. person maintains a physical address within the U.S. or utilizes
an APO or similar address. Non-U.S. persons may be permitted to invest under certain limited circumstances.
Payment for shares
redeemed
. Payment for shares presented for redemption may be delayed more than seven days only for (1) any period (a) during which the NYSE is closed other than customary weekend and holiday closings or (b) during which trading on
the NYSE is restricted; (2) for any period during which an emergency exists as a result of which (a) disposal by the Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for the Fund to
determine the value of its net assets; or (3) for such other periods as the SEC may by order permit.
Information about Purchases and
Redemptions
. The Fund has authorized a number of brokers to accept purchase and redemption orders on its behalf, and these brokers are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund’s
behalf. Orders placed with an authorized financial intermediary will be processed at the share price of the appropriate Series next computed after they are received in good order by the financial intermediary or its designee, provided that such
orders are transmitted to the Fund’s transfer agent in accordance with the Fund’s procedures and applicable law. Accordingly, for you to receive the current business day’s share price, your order must be received by an authorized
financial intermediary in good order before the close of regular trading on the NYSE.
Portfolio Managers
This section includes information about the Series’ portfolio managers, including information about the dollar range of Fund shares
they own, how they are compensated, and other accounts they manage.
The Advisor’s Senior Research Group establishes the broad investment
policies and guidelines used in the management of each Series.
A designated Research Team implements the investment policies and guidelines
as well as monitors the investment portfolio for each Series. The Research Team runs quantitative screens to identify stocks for inclusion in the portfolio in line with the Senior Research Group’s policies and guidelines. The resulting
portfolio of stocks meeting the quantitative criteria is reviewed and approved by the
28
members of the Series’ Research Teams. No specific member of the Series’ Research Teams is required to approve security purchases and sales.
The following individuals serve on the Advisor’s Senior Research Group and/or the Research Teams of the Series. This information is as of December
31, 2012.
|
|
|
|
|
|
|
|
|
Name and Title
|
|
Fund Management Role
|
|
Dollar Range of Equity
Securities
Beneficially Owned
by the Portfolio Manager in the
Series covered by this SAI
|
|
Dollar Range of Equity
Securities
Beneficially
Owned By the Portfolio
Manager in All
Manning & Napier
Fund Series
|
|
Christian A. Andreach, CFA,
Co-Head of Global Equities,
Senior
Analyst/Managing
Director of Consumer Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $500,001 and
$1,000,000
|
|
|
|
|
|
|
Ebrahim Busheri, CFA
Senior
Analyst Managing
Director of Emerging Growth
Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $100,001 and
$500,000
|
|
|
|
|
|
|
Jeffrey S. Coons, Ph.D., CFA,
President and Co-Director of Research
|
|
Member of Senior Research Group, Member of Series Research Teams
|
|
None
|
|
Between $500,001 and
$1,000,000
|
|
|
|
|
|
|
Jeffrey W. Donlon, CFA.
Senior
Analyst/Managing
Director of Technology Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $100,001 and
$500,000
|
|
|
|
|
|
|
Brian P. Gambill, CFA,
Senior
Analyst/Managing
Director of Capital Goods &
Materials Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $100,001 and
$500,000
|
|
|
|
|
|
|
Jeffrey A. Herrmann, CFA, Co-Head Global Equities,
Co-Director of Research/Managing Director of Themes & Overviews Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $500,001 and
$1,000,000]
|
|
|
|
|
|
|
Brian W. Lester, CFA,
Senior
Analyst/Managing Director of Life Sciences Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $500,001 and
$1,000,000
|
|
|
|
|
|
|
Michael J. Magiera, CFA,
Senior Analyst/Managing Director of Real Estate Group
|
|
Member of Senior Research Group
|
|
None
|
|
Over $1,000,000
|
|
|
|
|
|
|
Christopher F. Petrosino, CFA,
Senior Analyst/Managing
Director of Quantitative
Strategies Group
|
|
Member of Senior Research Group, Member of Series Research Teams
|
|
None
|
|
Between $100,001 and
$500,000
|
|
|
|
|
|
|
Richard J. Schermeyer, III, CFA,
Junior Analyst
|
|
Member of Series Research Teams
|
|
None
|
|
Between $50,001 and
$100,000
|
|
|
|
|
|
|
Marc Tommasi,
Head of Global
Investment Strategy, Senior Analyst/Managing Director of Global Strategies Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $500,001 and
$1,000,000
|
|
|
|
|
|
|
Virge J. Trotter, III, CFA,
Senior Analyst/Managing Director of Services Group
|
|
Member of Senior Research Group
|
|
None
|
|
Between $500,001 and
$1,000,000
|
|
|
|
|
|
|
Jeffrey M. Tyburski, CFA,
Senior Analyst
|
|
Member of Series Research Teams
|
|
None
|
|
Between $10,001 and
$50,000
|
29
Compensation
. Analyst compensation is provided in two basic forms: a fixed base salary and bonuses.
Bonuses may be several times the level of base salary for successful analysts. The analyst bonus system has been established to provide a strong incentive for analysts to make investment decisions in the best interest of MNA’s clients,
including Series shareholders.
Compensation may be provided to certain research analysts in the form of fixed bonuses determined by the
Co-Directors of Research or based on a portion of the bonuses paid in the analyst bonus system described above. Also, certain employees may be selected to purchase equity in the Advisor based upon a combination of performance and tenure. The Advisor
may utilize a bonus when recruiting new research employees to help defray relocation costs, if applicable. Equity ownership in the Advisor represents an important incentive for senior investment professionals and serves as another method to align
the long-term interest of employees with the best interest of our clients.
The compensation of the Series’ Research Teams and the Senior
Research Group is not dependent on the performance of the Series.
Management of Other Portfolios.
Each Series is managed using
quantitative security selection screens. For funds and separate accounts, the investment recommendations made by an equity analyst will be applied to all portfolios with investment objectives for which the recommendation is appropriate. In addition,
the Advisor manages the Series and separate accounts with the same objective with the same quantitative approach. As a result, the investment professionals involved in managing the Series of the Manning & Napier Fund that invest in equities
are also responsible for managing all other portfolios for clients of the Advisor that pursue similar investment objectives (“Similarly Managed Accounts”).
Accordingly, each portfolio manager listed below has been assigned portfolio management responsibility for portions of the Advisor’s Similarly Managed Accounts. The Senior Research Group sets broad
investment guidelines, and the individual analysts, including those that serve on the Research Teams of Fund Series, select individual securities subject to a peer review process. Because the portfolio management role of these individuals extends
across all of the Advisor’s Similarly Managed Accounts that hold equities, the information for each portfolio manager listed below relates to all the Similarly Managed Accounts.
Richard Schermeyer has portfolio management responsibility only for products, including the Series, that utilize largely quantitative investment approaches as well as mutual funds and separate accounts
managed with the Advisor’s Strategic Income strategies. Jeffrey Tyburski has portfolio management responsibility only for products, including the Series, that utilize largely quantitative investment approaches, as well as the Inflation Focus
Equity Series and separate accounts with the same strategy.
None of these accounts is subject to a performance-based fee. This information is
as of December 31, 2012. The information in the table below excludes the Series included in this SAI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Registered
Investment Companies
|
|
|
Other Pooled
Investment Vehicles
|
|
|
Other Accounts
|
|
|
|
Number of
Accts
|
|
Total Assets
*
|
|
|
Number of
Accts
|
|
Total Assets
|
|
|
Number of
Accts
|
|
Total Assets
|
|
|
Christian A. Andreach
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Ebrahim Busheri
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Jeffrey S. Coons
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Jeffrey W. Donlon
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Brian P. Gambill
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Jeffrey A. Herrmann
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Brian W. Lester
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Michael J. Magiera
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Christopher F. Petrosino
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Richard J. Schermeyer, III
|
|
3
|
|
$
|
137,363,781
|
|
|
10
|
|
$
|
2,008,124
|
|
|
83
|
|
$
|
897,865,011
|
|
|
Marc Tommasi
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Virge J. Trotter, III
|
|
30
|
|
$
|
15,570,948,904
|
|
|
27
|
|
$
|
4,898,608,736
|
|
|
7,796
|
|
$
|
22,987,053,912
|
|
|
Jeffrey M. Tyburski
|
|
2
|
|
$
|
135,191,642
|
|
|
10
|
|
$
|
2,008,124
|
|
|
81
|
|
$
|
1,009,121,536
|
|
|
*
|
At times assets of the Other Accounts in column 3 may be invested in these registered investment companies.
|
Management of Conflicts of Interest
. The Series are managed using quantitative security selection screens. The Advisor also manages
separately-managed accounts using the same stock selection approach. The compensation of the Series’ Research Teams and the Senior Research Group is not dependent on the performance of the Series or separate accounts managed in a similar style.
The
30
Advisor has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.
For the Fund, other pooled investment vehicles, and Other Accounts that have authorized it to do so, the Advisor trades equities and most fixed income
investments on an aggregate basis to increase efficiency of execution. In the event of a partially filled order, the Advisor uses a computer-generated randomizer to objectively assign the order of execution among accounts. Each account that
participates in an aggregated order on a particular execution will participate at the average security price with all transaction costs shared on a pro-rata basis.
The Advisor’s trading function for equities is separate from its research function; that is, the individuals recommending and approving security purchases are not the same individuals responsible for
executing the trades. Equity traders exercise individual discretion in order to get the Advisor’s clients the best possible execution on trades, but guidelines as to security, position size, and price are set by the analysts recommending the
security. Proprietary and third-party reporting systems monitor implementation of trading programs across the account base.
To remove the
incentive for unauthorized trading and speculation in client accounts, traders are not compensated for profits generated, since investment directives are issued from outside the trading area and then merely implemented by the traders. In addition,
the compensation program for individuals recommending securities purchases are based on the returns of the particular security recommended, rather than on the performance of any individual account.
Portfolio Transactions and Brokerage
The Agreement states that in connection with its duties to arrange for the purchase and the sale of securities held in the portfolio of the Fund by placing purchase and sale orders for the Fund, the
Advisor shall select such broker-dealers (“brokers”) as shall, in the Advisor’s judgment, implement the policy of the Fund to achieve “best execution”, i.e., prompt and efficient execution at the most favorable securities
price. In making such selection, the Advisor is authorized in the Agreement to consider the reliability, integrity and financial condition of the broker, the size and difficulty in executing the order and the value of the expected contribution of
the broker to the investment performance of the Fund on a continuing basis. The Advisor is also authorized to consider whether a broker provides brokerage and/or research services to the Fund and/or other accounts of the Advisor. The Fund
understands that a substantial amount of its portfolio transactions may be transacted with primary market makers acting as principal on a net basis, with no brokerage commissions being paid by the Fund. Such principal transactions may, however,
result in a profit to market makers. In certain instances the Advisor may make purchases of underwritten issues for the Fund at prices which include underwriting fees. The Agreement states that the commissions paid to such brokers may be higher than
another broker would have charged if a good faith determination is made by the Advisor that the commission is reasonable in relation to the services provided, viewed in terms of either that particular transaction or the Advisor’s overall
responsibilities as to the accounts as to which it exercises investment discretion and that the Advisor shall use its judgment in determining that the amount of commissions paid are reasonable in relation to the value of brokerage and research
services provided. The Advisor is further authorized to allocate the orders placed by it on behalf of the Fund to such brokers or dealers who also provide research or statistical material, or other services, to the Fund, the Advisor, or any
affiliate of either to the extent permitted by law. Such allocation shall be in such amounts and proportions as the Advisor shall determine, and the Advisor shall report on such allocations regularly to the Fund, indicating the broker-dealers to
whom such allocations have been made and the basis therefore.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and
pricing of investments. Examples of research-oriented services for which the Advisor might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies,
statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The research which the Advisor receives for the Fund’s
brokerage commissions, whether or not useful to the Fund, may be useful to the Advisor in managing the accounts of the Advisor’s other advisory clients. Similarly, the research received for the commissions of such accounts may be useful to the
Fund.
Brokerage Commissions Paid in Last Three Fiscal Years.
The Series were not active prior to the date of this SAI. Accordingly,
neither Series has paid any brokerage commissions.
Directed Brokerage.
The Series were not active prior to the date of this SAI.
Accordingly, neither Series has paid any brokerage commissions to brokers because of research services provided.
Regular
Broker-Dealers
. The Fund’s regular broker-dealers are (1) the ten broker-dealers that received the greatest dollar amount of brokerage commissions from the Fund; (ii) the ten broker-dealers that engaged as principal in the largest
dollar amount of portfolio transactions; and (iii) the ten broker-dealers that sold the largest dollar amount of Series shares. The Series were not active prior to the date of this SAI. Accordingly, neither Series has purchased shares issued by
the Series’ regular broker-dealers.
31
Net Asset Value
The NAV is determined on each day that the NYSE is open for trading. In determining the NAV of each Series’ shares, common stocks that are traded over-the-counter or listed on national securities
exchanges other than the NASDAQ National Market System are valued at the last sale price on the exchange on which each stock is principally traded as of the close of the NYSE (generally 4:00 p.m., Eastern time), or, in the absence of recorded sales,
at the closing bid prices on such exchanges. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price. Unlisted securities that are not included in such NASDAQ National Market System are
valued at the quoted bid prices in the over-the-counter market. Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in regulated investment companies are valued at their
NAV per share on valuation date. All securities initially expressed in foreign currencies will be converted to U.S. dollars using current exchange rates. Short securities positions are accounted for at value, using the same method of valuation
described above. Securities and other assets for which market quotations are not readily available or for which the Advisor deems the market quotations to be unreliable are valued by appraisal at their fair value as determined in good faith by the
Advisor under procedures established by and under the general supervision and responsibility of the Fund’s Board of Directors. The Advisor may use a pricing service to obtain the value of the Fund’s portfolio securities where the prices
provided by such pricing service are believed to reflect the fair market value of such securities. The methods used by the pricing service and the valuations so established will be reviewed by the Advisor under the general supervision of the
Fund’s Board of Directors. Several pricing services are available, one or more of which may be used as approved by the Fund’s Board of Directors.
The foreign securities held by the Series may be listed on foreign exchanges that trade on days when the NYSE is not open and the Series do not price their shares. As a result, the NAV of a Series may
change at a time when shareholders are not able to purchase or redeem shares.
If trading or events occurring in other markets after the close
of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value taking this trading or these events into account.
Federal Tax Treatment of Dividends and Distributions
The following is only a summary of certain tax considerations generally affecting the Series and their shareholders, and is not intended as a substitute for careful tax planning. Shareholders are urged to
consult their tax advisers with specific reference to their own tax situations, including their state and local tax liabilities.
The
following discussion of certain federal income tax consequences is based on the Code, and the regulations issued thereunder as in effect on the date of this SAI. New legislation, certain administrative changes, or court decisions may significantly
change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Qualification as a Regulated Investment Company
. It is the policy of each Series to qualify for the favorable tax treatment accorded regulated
investment companies under Subchapter M of the Code. By following such policy, each of the Series expects to be relieved of federal income tax on investment company taxable income and net capital gain (the excess of net long-term capital gain over
net short-term capital loss) timely distributed to shareholders.
In order to qualify as a regulated investment company each Series must,
among other things, (1) derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies and net income derived from an interest in a qualified publicly traded partnership (the
“Qualifying Income Test”); and (2) diversify its holdings so that at the end of each quarter of each taxable year (i) at least 50% of the market value of the Series’ total assets is represented by cash or cash items, U.S.
Government securities, securities of other regulated investment companies, and other securities limited, in respect of any one issuer, to a value not greater than 5% of the value of the Series’ total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government securities or securities of any other regulated investment company) or the securities
(other than the securities of other regulated investment companies) of two
32
or more issuers that are engaged in the same, similar, or related trades or businesses if the Series owns at least 20% of the voting power of each such issuer, or the securities of one or more
qualified publicly traded partnerships. These requirements may restrict the degree to which the Series may engage in certain hedging transactions and may limit the range of the Series’ investments. If a Series qualifies as a regulated
investment company, it will not be subject to federal income tax on the part of its net investment income and net realized capital gains, if any, which it timely distributes each year to the shareholders, provided the Series distributes at least
(a) 90% of its “investment company taxable income” (generally, net investment income plus the excess, if any, of net short-term capital gain over net long-term capital loss) and (b) 90% of its net exempt interest income (the
excess of (i) its tax-exempt interest income over (ii) certain deductions attributable to that income).
If a Series fails to
satisfy the qualifying income or diversification requirements in any taxable year, it may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure
to satisfy the applicable requirements. If these relief provisions are not available to a Series for any year in which it fails to qualify as a regulated investment company, all of its taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to shareholders, and its distributions (including capital gains distributions) generally will be taxable as ordinary income dividends to its shareholders, subject to the dividends received deduction for
corporate shareholders and lower tax rates on qualified dividend income for individual shareholders. In addition, the Series could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions
before requalifying as a regulated investment company under Sub-chapter M of the Code.
For taxable years beginning after December 22,
2010, each Series may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Series’ taxable income, net capital gain, net short-term capital gain, and
earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing the Series’ distributions for any calendar year. A
“qualified late year loss” generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as “post-October losses”)
and certain other late-year losses.
The treatment of capital loss carryovers for regulated investment companies is similar to the rules
that apply to capital loss carryovers of individuals, which provide that such losses are carried over by a fund indefinitely. Thus, if a Series has a “net capital loss” (that is, capital losses in excess of capital gains) for a taxable
year beginning after December 22, 2010, the excess of the Series’ net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of such Series’ next taxable year,
and the excess (if any) of the Series’ net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Series’ next taxable year. Certain rules require capital
losses incurred after December 22, 2010 to be utilized before losses incurred prior to December 22, 2010,, which, depending on the circumstances for the Series, may result in the expiration of losses incurred prior to December 22,
2010. In addition, the carryover of capital losses may be limited under the general loss limitation rules if the Series experiences an ownership change as defined in the Code.
Excise Tax
. If a Series fails to distribute in a calendar year at least 98% of its ordinary income for the year and 98.2% of its capital gain net income (the excess of short and long term capital
gains over short and long term capital losses) for the one-year period ending October 31 of that year (and any retained amount from the prior year), the Series will be subject to a nondeductible 4% federal excise tax on the undistributed
amounts. The Series generally intend to make sufficient distributions to avoid imposition of this tax. A Series may in certain circumstances be required to liquidate investments in order to make sufficient distributions to avoid federal excise tax
liability at a time when the investment advisor might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Series to satisfy the requirements for qualification as a regulated
investment company.
Distributions and Dividends
. Each Series receives income generally in the form of dividends and interest on
its investments. This income, less expenses incurred in the operation of the Series, constitutes their net investment income from which dividends may be paid to you. All or a portion of the net investment income distributions may be treated as
“Qualified Dividend Income” (eligible for the reduced maximum capital gains rate to individuals of up to 20% (lower rates apply to individuals in lower tax brackets)) to the extent that a Series receives and designates its dividends as
Qualified Dividend Income, The American Taxpayer Relief Act of 2012 (“ATRA”) raised the maximum rate from 15% to 20% for taxable years beginning after December 31, 2012. Qualified Dividend Income is, in general, dividend income from
taxable domestic corporations and certain foreign corporations (e.g., foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty with the United States, or the stock of which is
readily tradable on an established securities market in the United States). In order for some portion of the dividends received by a Series’ shareholder to be Qualified Dividend Income, the Series must meet the holding period and other
requirements with respect to the dividend paying stocks in its portfolio, and the shareholder must meet holding period and other requirements with respect to the Series’ shares.
Any distribution by a Series may be taxable to shareholders regardless of whether it is received in cash or in additional shares. The Series may derive capital gains and losses in connection with sales or
other dispositions of the portfolio securities. Distributions from
33
net short-term capital gains will generally be taxable to shareholders as ordinary income. Distributions from net long-term capital gains will be taxable to shareholders as long-term capital
gains regardless of how long the shares have been held. The new maximum tax rate on long-term capital gains is 20% (lower rates apply to individuals in lower tax brackets).. Certain distributions may qualify for a dividends-received deduction for
corporate shareholders, subject to holding period requirements and other limitations under the Code, if they are attributable to the qualifying dividend income a Series receives from a domestic corporation and are properly designated by that Series.
The Series will inform you of the amount of your ordinary income dividends, Qualified Dividend Income, and capital gain distributions shortly
after the close of each calendar year. Shareholders who have not held the Series’ shares for a full year should be aware that the Series may designate and distribute, as ordinary income or capital gain, a percentage of income that is not equal
to the actual amount of such income earned during the period of investment in the Series.
Distributions declared in October, November,
or December to shareholders of record during those months and paid during the following January are treated as if they were received by each shareholder on December 31 of the year in which they are declared for tax purposes.
If a Series’ distributions exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be re-characterized as a return of capital to shareholders. A return of capital distribution will generally not be taxable, but will reduce each shareholder’s cost basis in the Series’ shares and result in higher
reported capital gain or lower reported capital loss when those shares on which a distribution was received are sold.
Each Series is
treated as a separate corporation for federal income tax purposes. Each Series therefore is considered to be a separate entity in determining its treatment under the rules for regulated investment companies described herein. Losses in one Series do
not offset gains in another and the requirements (other than certain organizational requirements) for qualifying regulated investment company status are determined at the Series level rather than at the Fund level.
Beginning January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) will be subject to a new 3.8%
Medicare contribution tax on their “net investment income,” including interest, dividends, and capital gains (including capital gains realized on the sale, exchange, or redemption of shares of the Series).
Sale, Exchange, or Redemption of Shares
. Any gain or loss recognized on a sale, exchange or redemption of shares of a Series by a shareholder who
is not a dealer in securities will generally, for individual shareholders, be treated as a long-term capital gain or loss if the shares have been held for more than one year and otherwise generally will be treated as short-term capital gain or loss.
However, if shares on which a shareholder has received a net capital gain distribution are subsequently sold, exchanged or redeemed and such shares have been held for six months or less, any loss recognized will be treated as long-term capital loss
to the extent of the net capital gain distribution. In addition, the loss realized on a sale or other disposition of shares will be disallowed to the extent a shareholder repurchases (or enters into a contract or option to repurchase) shares within
a period of 61 days (beginning 30 days before and ending 30 days after the disposition of the shares). This loss disallowance rule will apply to shares received through the reinvestment of dividends during the 61-day period.
Each Series (or its administrative agent) is required to report to the Internal Revenue Service and furnish to shareholders the cost basis information
for shares of the Series purchased on or after January 1, 2012, and sold on or after that date. The Series is also required to report the cost basis information for such shares and indicate whether the shares had a short-term or long-term
holding period. Each time a shareholder sells shares, the Series will permit the shareholder to elect from among several Internal Revenue Service accepted cost basis methods, including average cost. In the absence of an election, the Series will use
average cost. The cost basis method elected by the shareholder (or the cost basis method applied by default) for each sale of shares may not be changed after the settlement date of each such sale of shares. Shareholders should consult with their tax
advisors to determine the best Internal Revenue Service accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them. The requirement to report gross proceeds from the
sale of shares of the Series continues to apply to all shares acquired through December 31, 2011, and sold on and after that date.
Federal Income Tax Treatment of Certain Series’ Investments
. A Series’ transactions in certain futures contracts, options, forward
contracts, foreign currencies, foreign debt securities, foreign entities treated as investment companies, derivative securities, and certain other investment and hedging activities will be subject to special tax rules. In a given case, these rules
may accelerate income to the Series, defer losses to the Series, require adjustments in the holding periods of the Series’ assets, convert short-term capital losses into
34
long-term capital losses, or otherwise affect the character of the Series’ income. These rules could therefore affect the amount, timing, and character of distributions to shareholders. Each
Series will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interest of the Series.
With respect to investments in zero coupon securities which are sold at original issue discount (“OID”) and thus do not make periodic cash interest payments, a Series will be required to include
as part of its current income the imputed interest on such obligations even though the Series has not received any interest payments on such obligations during that period. Because each Series distributes all of its net investment income to its
shareholders, a Series may have to sell securities to distribute such imputed income which may occur at a time when the Advisor would not have chosen to sell such securities and which may result in a taxable gain or loss. Special rules apply if a
Series holds inflation-indexed bonds. Generally, all stated interest on such bonds is recorded as income by the Series under its regular method of accounting for interest income. The amount of positive inflation adjustment, which results in an
increase in the inflation-adjusted principal amount of the bond, is treated as OID. The OID is included in the Series’ gross income ratably during the period ending with the maturity of the bond, under the general OID inclusion rules. The
amount of the Series’ OID in a taxable year with respect to a bond will increase the Series’ taxable income for such year without a corresponding receipt of cash, until the bond matures. As a result, the Series may need to use other
sources of cash to satisfy its distributions for such year. The amount of negative inflation adjustments, which results in a decrease in the inflation-adjusted principal amount of the bond, reduces the amount of interest (including stated interest,
OID, and market discount, if any) otherwise includible in the Series’ income with respect to the bond for the taxable year.
Any market
discount recognized on a bond is taxable as ordinary income. A market discount bond is a bond acquired in the secondary market at a price below redemption value or adjusted issue price if issued with original issue discount. Absent an election by a
Series to include the market discount in income as it accrues, gain on its disposition of such an obligation will be treated as ordinary income rather than capital gain to the extent of the accrued market discount.
Each Series is required for federal income tax purposes to mark-to-market and recognize as income for each taxable year its net unrealized gains and
losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and options contracts on broad-based indexes required to be marked to market will be 60% long-term and 40%
short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders. A Series may be required to defer the recognition of losses on futures contracts, options contracts and swaps to the
extent of any unrecognized gains on offsetting positions held by the Series. It is anticipated that any net gain realized from the closing out of futures or options contracts with respect to securities may be considered gain from the sale of
securities and therefore may be qualifying income for purposes of the Qualifying Income Test. Each Series distributes to shareholders at least annually any net capital gains which have been recognized for federal income tax purposes, including
unrealized gains at the end of the Series’ fiscal year on futures or options transactions. Such distributions are combined with distributions of capital gains realized on the Series’ other investments, and shareholders are advised on the
nature of the distributions.
Certain investments in other underlying funds and ETFs may not produce qualifying income for purposes of the
Qualifying Income Test (as described above) which must be met in order for a Series to maintain its status as a regulated investment company under the Code. If one or more underlying funds and/or ETFs generates more non-qualifying income for
purposes of the Qualifying Income Test than the Series’ portfolio management expects, it could cause the Series to inadvertently fail the Qualifying Income Test, thereby causing the Series to inadvertently fail to qualify as a regulated
investment company under the Code.
Foreign Investments
. Transactions by a Series in foreign currencies and forward foreign
currency contracts will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Series (i.e., may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Series and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require the Series to mark-to-market certain types of positions in
its portfolio (i.e., treat them as if they were closed out) which may cause the Series to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the regulated investment company distribution
requirements for avoiding income and excise taxes. Each Series intends to monitor its transactions, intends to make the appropriate tax elections, and intends to make the appropriate entries in its books and records when it acquires any foreign
currency or forward foreign currency contract in order to mitigate the effect of these rules so as to prevent disqualification of the Series as a regulated investment company and minimize the imposition of income and excise taxes.
Dividends and interest received by a Series may be subject to income, withholding or other taxes imposed by foreign countries and United States
possessions that would reduce the yield on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to
investments by foreign investors. If more than 50% of the value of a Series’ total assets at the close of its taxable year consists of stock or securities of foreign corporations, the Series will be eligible to, and may, file an election with
the Internal Revenue Service that will enable shareholders, in effect, to receive the benefit of the foreign tax credit with respect to any foreign and United States possessions’
35
income taxes paid by the Series. If the Series were to make such an election, the Series would treat those taxes as dividends paid to its shareholders. Each shareholder would be required to
include a proportionate share of those taxes in gross income as income received from a foreign source and to treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes
deemed paid by him or her in computing his or her taxable income or, alternatively, use the foregoing information in calculating the foreign tax credit (subject to significant limitations) against the shareholder’s federal income tax. If a
Series makes the election, it will report annually to its shareholders the respective amounts per share of the Series’ income from sources within, and taxes paid to, foreign countries and United States possessions.
Foreign tax credits, if any, received by a Series as a result of an investment in another regulated investment company (including an ETF which is taxable
as a regulated investment company) will not be passed through to shareholders unless the Series qualifies as a “qualified fund-of-funds” under the Code. If the Series is a “qualified fund-of-funds” it will be eligible to file an
election with the Internal Revenue Service that will enable it to pass along these foreign tax credits to its shareholders. A Series will be treated as a “qualified fund-of-funds” if at least 50% of the value of the Series’ total
assets (at the close of each quarter of the Series’ taxable year) is represented by interests in other regulated investment companies.
If a Series owns shares in certain foreign investment entities, referred to as “passive foreign investment companies” or “PFIC,” the Series will be subject to one of the following
special tax regimes: (i) the Series is liable for U.S. federal income tax, and an additional interest charge, on a portion of any “excess distribution” from such foreign entity or any gain from the disposition of such shares, even if
the entire distribution or gain is paid out by the Series as a dividend to its shareholders; (ii) if the Series were able and elected to treat a PFIC as a “qualifying electing fund” or “QEF,” the Series would be required
each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Series’
pro rata
share of the ordinary earnings and net capital gains of the PFIC, whether or not such
earnings or gains are distributed to the Series; or (iii) the Series may be entitled to mark-to-market annually shares of the PFIC, and in such event would be required to distribute to shareholders any such mark-to- market gains in accordance
with the distribution requirements set forth above.
Backup Withholding
. In certain cases, a Series will be required to withhold and
remit to the U.S. Treasury 28% of any taxable dividends, capital gain distributions and redemption proceeds paid to a shareholder (1) who has failed to provide a correct and properly certified taxpayer identification number, (2) who is
subject to backup withholding by the Internal Revenue Service, (3) who has not certified to the Fund that such shareholder is not subject to backup withholding, or (4) who has failed to certify that he or she is a U.S. person (including a
U.S. resident alien). This backup withholding is not an additional tax, and any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability.
Foreign Shareholders
. Foreign shareholders (i.e., nonresident alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at the rate
of 30% (or a lower tax treaty rate) on distributions derived from net investment income including short-term capital gains; provided, however, that for the Series’ taxable years beginning on or before December 31, 2013,
“interest-related dividends” and “qualified short-term gain” generally will not be subject to U.S. withholding taxes. Distributions to foreign shareholders of such interest-related dividends, qualified short-term gain, and of
long-term capital gains and any gains from the sale or other disposition of shares of a Series generally are not subject to U.S. taxation, unless the recipient is an individual who either (1) meets the Code’s definition of “resident
alien” or (2) is physically present in the U.S. for 183 days or more per year. Certification of foreign status by such shareholders also will generally be required to avoid backup withholding on capital gain distributions and redemption
proceeds. Different tax consequences may result if the foreign shareholder is engaged in a trade or business within the United States. In addition, the tax consequences to a foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
A U.S. withholding tax at a 30% rate will be imposed on dividends (beginning January 1, 2014) and
gross redemption proceeds (beginning January 1, 2017) received by certain non-U.S. entities that fail to comply with new reporting and withholding requirements (commonly referred to as “FATCA”) designed to inform the U.S. Treasury of
U.S. owned foreign investment accounts. Shareholders may be requested to provide additional information to the Series to determine whether withholding is required.
36
Foreign shareholders are urged to consult their own tax advisors concerning the applicability of
the U.S. withholding tax and the proper withholding form(s) to be submitted to the Series.
Tax-Exempt Shareholders
. Certain
tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally are exempt from federal income taxation except with respect to their
unrelated business taxable income (“UBTI”). Under current law, the Series generally serve to block UBTI from being realized by their tax-exempt shareholders. However, notwithstanding the foregoing, a tax-exempt shareholder could realize
UBTI by virtue of an investment in a Series where, for example: (i) the Series invests in residual interests of Real Estate Mortgage Investment Conduits (REMICs); (ii) the Series invests in a REIT that is a taxable mortgage pool (TMP) or
that has a subsidiary that is TMP or that invests in the residual interest of a REMIC, or (iii) shares in the Series constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Section 514(b) of the
Code. Charitable remainder trusts are subject to special rules and should consult their tax advisor. The Internal Revenue Service has issued guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts,
are encouraged to consult with their tax advisors regarding these issues.
Potential Reporting Requirements
. Under U.S. Treasury
regulations, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886.
Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company such as the Series are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
State and Local Taxes
. Distributions by the Series to shareholders and the ownership of shares may be subject to state and local taxes. Therefore, shareholders are urged to consult with their tax
advisors concerning the application of state and local taxes to investments in the Series, which may differ from the federal income tax consequences.
Many states grant tax-free status to dividends paid to shareholders from interest earned on direct obligations of the U.S. Government, subject in some states to minimum investment requirements that must
be met by the Series. Investments in Ginnie Mae or Fannie Mae securities, bankers acceptances, commercial paper, and repurchase agreements collateralized by U.S. Government securities do not generally qualify for such tax-fee treatment. The rules on
exclusion of this income are different for corporate shareholders. Shareholders are urged to consult with their tax advisors regarding whether, and under what conditions, such exemption is available.
Shareholders should consult their own tax advisors regarding the effect of federal, state and local taxes affecting an investment in shares of the
Series.
Performance Reporting
The performance of the Series of the Fund may be compared in publications to the performance of various indices and investments for which reliable
performance data is available. It may also be compared to averages, performance rankings, or other information prepared by recognized mutual fund statistical services. The Series’ annual reports contain additional performance information. These
reports are available without charge at the Fund’s website, www.manning-napier.com, or by calling 1-800-466-3863.
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Appendix C – Manning & Napier Advisors, LLC Proxy Policy
PROXY POLICY
Table of Contents
2
Policy
BACKGROUND
Proxy
policy has had a lengthy history in the investment world. The Department of Labor’s (“DOL”) active voice in proxy policy began in 1998 with the Avon letter followed by the Proxy Project Report in 1989. Each notice by the DOL further
defined and clarified the importance of exercising proxy votes in an active and diligent manner. Unless the plan documents explicitly reserve voting authority to the trustee, the investment manager has the authority – and the obligation –
to vote as a fiduciary.
The Monks letter, issued by the DOL in January 1990, stated that the investment manager has a fiduciary
obligation to match proxies received with holdings on a record date and to take reasonable steps to ensure that the proxies for which it is responsible are received. It further states that the named fiduciary who appointed the investment manager
must periodically monitor the activities of the investment manager, which includes the monitoring of proxy procedures and proxy voting.
In 1994, the DOL issued Interpretive Bulletin #94-2, (the “Bulletin”), which summarizes the Department’s previous statements on the duties of ERISA fiduciaries to vote proxies relating to
shares of corporate stock, and describes the Department’s view of the legal standards imposed by ERISA on the use of written statements of investment policy, including proxy voting. The Bulletin “reaffirms its longstanding position that
plan officials are responsible for voting proxies, unless that responsibility has been delegated to an investment manager. In that case, plan officials should monitor the manager’s activities.”
The Bulletin concludes, “where the authority to manage plan assets has been delegated to an investment manager, the general rule is
that the investment manager has the sole authority to vote proxies relating to such plan assets. If the plan document or the investment management contract expressly precludes the investment manager from voting proxies, the responsibility would lie
with the trustee or with the named fiduciary who has reserved to itself (or another authorized fiduciary) the right to direct the plan trustee regarding the voting of proxies.” The Bulletin notes that a reservation could be limited to the
voting of only those proxies relating to specified assets or issues.
In 2003, the Securities and Exchange Commission (the
“SEC”) adopted rule and form amendments under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940 to require registered investment advisors and
registered mutual fund companies to provide disclosure on voting proxies. The amendments require notification to clients of the method to obtain proxy records and policy. The advisor is required to disclose voting records and make available policies
and procedures reasonably designed to ensure that the advisor votes proxies in the best interests of their clients.
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PROXY POLICY
In accordance with the guidelines of the DOL and the SEC, it is Manning & Napier’s policy regarding proxies to:
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1.
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Discharge our duties prudently, in the interest of plans, plan fiduciaries, plan participants, beneficiaries, clients and shareholders (together
“clients”).
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2.
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Act prudently in voting of proxies by considering those factors, which would affect the value of client assets.
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3.
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Maintain accurate records as to voting of such proxies that will enable clients to periodically review voting procedures employed and actions taken in
individual situations.
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4.
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Provide, upon request, a report of proxy activity for clients reflecting the activity of the portfolio requested.
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5.
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By following our procedures for reconciling proxies, take reasonable steps under the particular circumstances to ensure that proxies for which we are
responsible are received by us.
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6.
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Make available, upon request, this policy to all plan fiduciaries, client, and shareholders.
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7.
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Comply with all current and future applicable laws, rules, and regulation governing proxy voting.
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Procedures
INTRODUCTION
“Proxy Season” is generally defined as February to June (although there are meetings held throughout the year, this is the peak
period). During this time, Manning & Napier receives thousands of proxies and annual statements for processing. The purpose of this section of the booklet is to explain our process in accordance with SEC and DOL requirements. This booklet
can be retained to satisfy the DOL requirement that fiduciaries monitor the voting procedures of the investment manager.
ARRIVAL OF THE
PROXIES
The majority of proxy ballots are received electronically through a centralized system used by many custodians.
This electronic link allows for daily notification, monitoring, efficient voting and record keeping of the Firm’s proxy voting activity.
However, some proxies are still received in paper form and are mailed to the Firm. When proxies are received from the Post Office, they are delivered to the Firm and provided to our Proxy Department.
FILE ORGANIZATION AND VOTING DIRECTION
A. Procedures for Manning Yield Dividend-Focus Portfolio and Manning & Napier Fund, Inc. Dividend Focus Series
When the proxies arrive, the Corporate Actions & Proxy Processor logs the proxy into our centralized proxy management software, creates a file containing proxy materials, inserts an analyst
checklist, and adds any proxy materials received. For each proxy, the Corporate Actions & Proxy Processor will then determine whether the security that is the subject of the proxy is held by the Dividend Focus Series and one or more other
series with the Manning & Napier Fund, Inc. (the “Fund”).
With respect to a security held by the Dividend
Focus Series and one or more other series of the Fund, such proxies will be voted in accordance with Manning & Napier’s Proxy Guidelines and the procedures described under sub-section B below. All other proxies for the Dividend Focus
Series and all proxies for the Manning Yield Dividend-Focus Portfolio will be voted under Glass Lewis & Co’s standard proxy voting guidelines, an independent company that specializes in providing a variety of proxy-related services.
5
In light of the foregoing, Manning & Napier has reviewed and determined that Glass
Lewis & Co’s proxy policy guidelines are consistent with Manning & Napier’s Proxy Policy and its fiduciary duty with respect to its clients. Manning & Napier will review any material amendments to Glass
Lewis & Co’s Proxy Procedures to determine whether such procedures continue to be consistent with Manning & Napier’s Proxy Policy and its fiduciary duty with respect to it clients. A summary of Glass Lewis &
Co’s Proxy Procedures is attached as an addendum to this policy.
B. Procedures for All Other Investment Companies and
Clients
When the proxies arrive, the Corporate Actions & Proxy Processor logs the proxy into our centralized proxy
management software, creates a file containing proxy materials, inserts an analyst checklist, adds any proxy materials received, and forwards to the Research Administrative Assistant. The Research Administrative Assistant logs the proxy receipt onto
the proxy log, enters the votes into the centralized proxy management software according to Manning & Napier proxy policy guidelines, prints the proxy report, reviews issues and adds reference materials. The proxy is then forwarded to the
appropriate analyst. The analyst reviews the materials, reviews the proxy report, indicates his agreement with votes according to Manning & Napier proxy procedures and approves by signature and returns the file to the Research
Administrative Assistant. The Research Administrative Assistant then checks the proxy folder to make sure the analyst has signed both the proxy vote report and the non-conflict of interest form stapled in the back cover of the proxy folder. The
proxy log is marked as complete and the file is returned to the Corporate Actions & Proxy Processor. If voting is contrary to the general recommendations of Manning & Napier’s Proxy Guidelines on any issue, the analyst must
document why this vote is in the economic best interest of shareholders. Also, the rationale for votes on issues for which these guidelines do not make general recommendations must be documented. These votes and rationales are later reported upon
request to fiduciaries, clients and shareholders in the Proxy Voting Report. The Corporate Actions & Proxy Processor is responsible for maintaining the proxy files by security, by year and provides safekeeping of the documents. Vote
decisions are kept in the folders as well as the proxy database. In the event of an error in voting, the Manager of Research Administration will complete the error write-up and notify the CCO.
With respect to proxies of a Series of the Manning & Napier Fund, Inc., Manning & Napier will vote such proxies in the
same proportion as the vote of all other shareholders of the Series (i.e., “echo vote”), unless otherwise required by law. When required by law or SEC exemptive order (if applicable), Manning & Napier will also “echo
vote” proxies of an unaffiliated mutual fund or exchange traded fund (“ETF”). When not required to “echo vote,” Manning & Napier will delegate to Glass Lewis & Co. responsibility for voting proxies of an
unaffiliated mutual fund or ETF in accordance with Glass Lewis & Co’s proxy voting policies and procedures, subject to any custom policies of Manning & Napier set forth herein.
If the Firm and/or its affiliates own greater than a 25% position in an iShares Exchange Traded Fund, we will vote the shares in the same
proportion as the vote of all other holders of shares of such iShares fund.
CORPORATE ACTIONS
The monitoring of corporate actions is done by the Corporate Actions & Proxy Processor in the Operations Department. The firm
subscribes to CCH Incorporated (Capital Changes Incorporated), an online Corporate Actions monitoring company. With this subscription, the Firm is able to check daily corporate actions for clients’ holdings and retrieve historical data as well.
The Corporate Actions Coordinator is also in contact with the Mutual fund Accounting Department and the sub-transfer agent for the Fund as they all share/verify information regarding corporate actions. Voluntary corporate actions are verified
through Bloomberg and with the custodian. Verification of mandatory corporate actions is done monthly through our Reconciling Department.
6
CONFLICTS OF INTEREST
There are potential conflicts of interest that may arise in connection with the Firm or the Analyst responsible for voting a company’s
proxy. Examples of potential conflicts may include the following: (1) the voting Analyst is aware that a client of the advisor or its affiliates is a public company whose shares are held in client portfolios; (2) the voting Analyst (or a
member of their immediate family) of the advisor or its affiliates also has a personal interest in the outcome of a matter before shareholders of a particular security that they cover as an Analyst; (3) an employee (or a member of their
immediate family) of the advisor or its affiliates is a Director or Officer of such security; (4) an employee (or a member of their immediate family) is a Director candidate on the proxy; or (5) the voting Analyst (or a member of their
immediate family), the advisor or its affiliates have a business relationship with a participant in a proxy contest, corporate director or director candidates.
In recognizing the above potential conflicts, the following controls have been put in place: (1) a written confirmation provided in the proxy folder that no conflict of interest exists with respect to
each proxy vote to be completed by the Analyst. If an Analyst indicates an affirmative response to any of the above conflicts identified such Analyst shall be immediately removed from the responsibility of voting such proxy; and (2) a Proxy
Policy committee has been created to resolve any apparent or potential conflicts or interest. The Proxy Policy Committee may utilize the following to assist in seeking resolution (including, without limitation, those instances when the Advisor
potentially has an institutional conflict): (1) voting in accordance with the guidance of an independent consultant or outside counsel; (2) designation of a senior employee of committee member to vote that has neither a relationship with
the company nor knowledge of any relationship between the advisor or its affiliates with such company; (3) voting in proportion to other shareholders of the issuer; (4) voting in other ways that are consistent with the advisor and its
affiliates obligation to vote in clients’ collective best interest.
The Proxy Policy Conflicts Committee is responsible for
developing procedures to identify material conflicts of interest with respect to the activities of Manning & Napier and Glass Lewis & Co.
PROXY RECONCILIATION
Manning & Napier has a customized computer
program designed to produce a proxy reconciliation report which prints in detail all of the information necessary to match the proxies of a ballot to the holdings on the record date. After both electronic and paper ballots have been matched to the
holdings on the record date, voted pursuant to the procedures and returned to the company, a review of the proxy report will show any proxies not received. In the event a proxy is not received, an email is sent to the custodian requesting a control
number so that the votes can be entered manually online.
In the event a proxy ballot is received by Manning & Napier
for a security which we do not have investment discretion or proxy authority, a best effort will be made to redirect the proxy to the record owner.
OUTSIDE VENDOR
Manning & Napier Advisors, LLC has an
established proxy policy with detailed procedures and guidelines. Manning & Napier’s policy is to monitor and vote proxies in the best interest of our clients and in compliance with applicable laws, rules and regulations. The Firm may
outsource its proxy voting, including when the Firm has identified a conflict of interest, for certain products.
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INQUIRIES
If you have any questions regarding our proxy voting procedures or if you would like to obtain a copy of our voting record for your holdings, please direct your written request to your Account
Representative.
Guidelines
ANALYSTS’ GUIDELINES
The analysis of individual stock proxy issues
is a component of equity research, and thus Manning & Napier has a fiduciary responsibility to vote proxies according to the economic best interests of our clients. The research analyst who recommended the stock or who is responsible for
following stocks in a particular industry reviews voting direction on an individual basis. The analyst considers the specific investment strategy used to buy the stock, in conjunction with the guidelines outlined below. It is expected that the
analyst will discharge his/her proxy duties prudently, solely in the best interest of our clients, and for the exclusive purpose of providing benefits to those clients.
The following serves as a guide to aid the analysts in voting proxies. This list is not exhaustive, and is subject to revision as new issues arise. Ultimately, it is up to the analyst to decide what is best
in each individual situation, considering what best serves shareholders’ interests. The underlying principle is to protect the value of the security. Value is affected by proxy issues such as voting rights, limits on ownership, accountability
of management and directors, etc. A secondary principle is that it is not up to us as fiduciaries to make a social stand on issues, unless they clearly affect the rights of shareholders and the value of the security.
CORPORATE GOVERNANCE/OTHER LOBBYIST COMMUNICATIONS
Periodically, the analysts may receive calls from lobbyists or solicitors trying to persuade us to vote a certain way on a proxy issue, or from other large stockholders trying to persuade us to join our vote
with theirs to exercise control of the company. We will take their opinions into consideration, but our policy is simply to vote in accordance with what we feel is in the best interest of our clients and shareholders and which maximizes the value of
their investment.
STANDARD DOMESTIC ISSUES
Election of Directors: Generally, if not contested, we will vote FOR the nominated directors. For each director, care must be taken to determine from the proxy statement each director’s: attendance at
meetings, investment in the company, status inside and outside company, governance profile, compensation, independence from management, and related/relevant parameters. If the director’s actions are questionable on any of these items, the
analyst may WITHHOLD election for the director.
In a contested race, voting decisions should be based on the track record of
both slates of candidates, an analysis of what each side is offering to shareholders, and a determination of the likelihood of each slate to fulfill promises. Candidate backgrounds and qualifications should be considered, along with benefit to
shareholders of diversity on the board. If the proposed election of directors would change the number of directors, the change should not diminish the overall quality and independence of the board.
8
Because of the complexity and specific circumstances of issues concerning a contested race,
these issues should be decided on a case-by-case basis.
Appointment of Auditors: A change of auditors that compromises the
integrity of the independent audit process or a change of auditors due to the auditors’ refusal to approve a company’s financial statement should be voted AGAINST.
NON-STANDARD DOMESTIC ISSUES
Director/Management Accountability:
As overseers of management for the shareholders, directors should be held accountable to shareholders. We therefore recommend a vote AGAINST any proposal which would limit director liability. Examples would include proposals to limit director
liability or independence, or to unreasonably indemnify directors.
While it may be inevitable, especially in smaller companies,
that the positions of Chairperson and Chief Executive Officer be combined in some cases, it generally increases management accountability to shareholders if the CEO is accountable to an independent Chairman. Therefore, we recommend a vote FOR
proposals requiring that different persons serve as the Chairperson and Chief Executive Officer.
Similarly, where practical, any
nominating, compensation, or audit committees should be independent of management. The purpose of these Committees is the implementation of Board oversight of management, and this purpose is best served if the majority of directors on such
committees are independent directors. Therefore, we recommend a vote FOR requirements that these committees have a majority of independent directors.
Compensation Issues:
Stock Incentive Plans usually permit a compensation committee to issue stock options to “key” personnel. These plans usually specify the maximum number of shares to be
issued but do not specify under what conditions they would be issued. This is not necessarily a problem, as we wish to leave most compensation issues to management (unless someone is grossly overpaid), and we want management and employees in general
to own stock so that their interests will be more in line with shareholders. Consequently, we have to examine the incentive plan carefully to see if it is overly generous. If the shares proposed to be issued to management total 50% of the
outstanding shares, then the value of our clients’ holdings have probably fallen 50%.
When deciding whether or not to vote
for these plans, we consider whether there will be too much dilution. Increasing the number of shares outstanding by 5% each year for 10 years is clearly too much dilution. Second, we consider the market value at current prices and with a slight
change in market value. If management has been doing a poor job, should an additional $100 million in compensation be paid if the stock goes up by 10%? Not likely. Finally, we are suspicious of any plan that entitles management to buy stock below
market value. They will be compensated for doing nothing at all for shareholders. Any vote cast regarding Stock Incentive Plans should be determined on a case-by-case basis and must be justifiable by the analyst casting the vote.
This analysis should also apply to other forms of Executive Compensation plans. Any such programs should provide challenging performance
objectives and serve to motivate executives, and should not be excessively generous or provide incentives without clear goals. With these considerations in mind, any vote on Executive Compensation should be determined on a case-by-case basis. As a
general rule, we recommend votes FOR proposals to link compensation to specific performance criteria and FOR proposals that increase the disclosure of management compensation, while we recommend votes AGAINST “golden parachutes”, and
similar proposals, unless the award protects the shareholders by only being granted when the shareholders have benefited along with the executives receiving the award. With regards to SERP’s, or Supplemental Executive Retirement Plans, we would
generally vote FOR shareholder proposals requesting to put extraordinary benefits contained in supplemental executive retirement plan’s
9
agreements to a shareholder vote, unless the company’s executive pension plans do not
contain excessive benefits beyond what is offered under employee-wide plan. SERPs may be viewed as discriminatory. Participating executives, who are selected by the company, may get better benefit formulas that provided under the employee-wide plan.
Therefore, all other issues in relation to SERPs should be voted on a case-by-case basis.
In general, we would vote FOR
shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its
industry, and is not unduly burdensome to the company. We would vote AGAINST shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation. We would also vote AGAINST shareholder
proposals requiring director fees be paid in stock only.
We would vote FOR shareholder proposals to put option re-pricings to a
shareholder vote. In addition, we would vote FOR shareholders proposals seeking disclosure of the board’s or compensation committee’s use of compensation consultants, such as the company name, business relationships and fees paid.
We would vote on a case-by-case basis on shareholder proposals that request the board establish a pay-for-superior performance
standard in the company’s compensation plan for senior executives. The vote for such issues would be based on what aspects of the company’s current annual and long-term equity incentive programs are performance driven. Finally, we would
vote on a case-by-case basis for all other shareholder proposals regarding executive and director pay, taking into account the company’s performance, pay levels versus peers’ compensation, pay level versus industry-typical compensation,
and long-term corporate outlook.
Outside director incentives work best when they are closely aligned with the interest of the
shareholders (e.g., compensation in the form of reasonable stock grants) and are not at the discretion of management (e.g., revocable benefits). Based on these principles, votes on most outside director compensation issues should be made on a
case-by case basis.
Terms of Directors:
In order to hold directors accountable, they should be subject to frequent
re-election – ideally, on an annual basis. Therefore, we recommend a vote AGAINST any proposal to extend the terms of directors and a vote FOR any proposal to shorten the term of directors in office. This is not to be construed as a limit on
terms that can be served, but merely a preference to make directors stand for election regularly.
Staggered Boards:
A
staggered board is one in which directors are divided into three (sometimes more) classes, with each serving three-year (sometimes more) terms, with each class re-election occurring in a different year. A non-staggered Board serves a one-year term
and Directors stand for re-election each year.
Proposals to adopt a staggered board amendment to the charter or bylaws usually
are accompanied by provisions designed to protect the staggered board. Such provisions may include: supermajority voting requirements if shareholders wish to increase the number of directors; provisions allowing shareholders to remove directors only
for cause; provisions stipulating that any board vacancies occurring between elections be filler only by a vote of the remaining board members, not the shareholders; and lock-in provisions requiring a supermajority shareholder vote to alter the
amendment itself. All of these provisions reduce director accountability and undermine the principle that directors should be up for re-election on a frequent basis. We, therefore, recommend a vote AGAINST such proposals.
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Majority Vote in Director Elections:
We would generally vote FOR binding resolutions
requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding
resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats. Companies should also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so
that the company will promptly address the situation of a holdover director.
Cumulative Voting:
Cumulative voting permits
proportional representation on the board of directors. Without it, a group with a simple majority could elect all directors. However, there are issues that arise depending on whether the board is staggered or non-staggered.
On a non-staggered board, cumulative voting exposes management to the disciplinary effects of the market for corporate control, which, in
turn, encourages management to maximize share value. On a staggered board, cumulative voting can act as an anti-takeover defense and, and as a result, could diminish the positive impact on management efficiency of the market for corporate control.
Due to the complexity of this issue, any vote cast regarding cumulative voting should be determined on a case-by-case basis
after careful consideration by the analyst responsible for that security. The basic principle of protecting property value of the security should be the determining criteria.
Supermajority Voting Provisions:
Many proxy proposals require only a majority vote from shareholders in order to be ratified. Supermajority provisions are those that require more than a majority,
usually 67% to 80% of the outstanding shares. These proposals generally provide that such a supermajority provision cannot be changed without the vote of the same percentage of shares outstanding. These provisions are usually intended to prevent any
takeover of the company and to insulate insiders from shareholder pressure. We recommend a vote AGAINST such a proposal. Exceptions would be in cases where there is an economic benefit to protecting the interests of minority shareholders.
Multiple Classes of Stocks:
Multiple classes of stock, which would give more voting rights to one class of shareholders
at the expense of another, would clearly affect the rights of all shareholders. We recommend a vote AGAINST any proposal which divides common equity into more than one class of stock or which limits the voting rights of certain shareholders of a
single class of stock. The exception would only occur if a subsidiary of a company issued its own class of common stock, such as General Motor’s class E (for EDS) and H (for Hughes) stock.
Similarly, we recommend a vote AGAINST any proposal to give the board of directors broad powers with respect to establishing new classes of
stock and determining voting, dividend, and other rights without shareholder review. An example would be requests to authorize “blank check” preferred stock.
Poison Pills:
Stock Purchase Rights Plans (“Poison Pills”) generally take the form of rights or warrants issued to shareholders that are triggered by an outside acquiring a predetermined
quantity of stock in the corporation. When triggered, Poison Pills give shareholders the ability to purchase shares from or sell shares back to the company or, in the case of a hostile acquisition, to the potential acquirer at a price far out of
line with their fair market value. The triggering event can either transfer a huge amount of wealth out of the Target Company or dilute the equity holdings of the potential acquirer’s pre-existing shareholders. In both cases, the Poison Pill
has the potential to act as a doomsday machine in the event of an unwanted control contest, providing a target’s board with veto power (all it has to go is refuse to redeem the pill) over takeover bids, even if they are in the best interest of
target shareholders.
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Rights plans are promoted by management as a method of ensuring that a firm’s
potential acquirers do not give a two-tiered offer for a firm. This would have the effect of forcing a shareholder to tender his shares against his will. Although there may be some truth to this argument, the bottom line is that they permit some
shareholders to obtain stock at a discount while preventing others from doing so. They can discourage outsiders from taking a position in the firm, because a certain level of ownership would result in lost property rights. Insiders want to protect
their position and reduce the influence of outsiders. This type of proposal reduces director and management accountability to shareholders, and consequently we recommend a vote AGAINST such proposals. Exceptions can be made in cases where takeover
attempts are detrimental to the long-term economic best interests of the shareholders and/or if the poison pill may raise the takeover premium received by existing shareholders.
Special Meetings of Shareholders:
Any proposal which would limit or restrict the ability of shareholders to call a special meeting
would limit their ability to exercise their rights as a shareholder. Since these proposals are contrary to shareholder interests, we recommend a vote AGAINST any proposal that would place such limits.
Shareholder recovery of proxy contest costs:
Voting to reimburse proxy solicitation expenses should be analyzed on a case-by-case
basis. Shareholders who initiate proxy contests against fund boards sometimes seek to have their expenses from the solicitation reimbursed by the fund. Generally, while the dissident in this situation has initiated certain proposals for the benefit
of fund shareholders, they have done so at their own risk.
Confidential Voting:
Confidential voting is the best way to
guarantee an independent vote. Shareholders must be able to vote all proxies on the merits of each proposal. Open voting alters the concept of free choice in corporate elections and proxy proposal by providing management the opportunity to influence
the vote outcome – they can see who has voted for or against proposals before the final vote is taken and therefore management can pressure institutional shareholders, suppliers, customers, and other shareholders with which it maintains a
business relationship. This process, which would give management the opportunity to coerce votes from its shareholders, destroys the concept of management accountability. Therefore, we recommend a vote FOR confidential voting.
Greenmail:
Targeted share repurchases by management (Greenmail) of company stock from an individual or select group seeking control
of the company is overly abusive to shareholders’ interests and often disruptive to management. Since only the hostile party receives payment, the practice is discriminatory to all other shareholders of the company. With Greenmail, management
transfers significant sums of corporate cash (not their own) to one entity for the sole purpose of saving their positions – cash that could be put to use for reinvestment in the company, payment of dividends, or to fund a public share
repurchase with shareholders participating on an equal basis.
By raising the specter of a change in control (whether he intended
to follow through on it or not), the Greenmailer receives payment (usually at a substantial premium over the market value of his shares). Management is once again safe and sound (until the next Greenmailer appears), and the shareholders are left
with an asset-depleted, often less competitive company. Unless there is a legitimate benefit to shareholders in general, or our clients in particular, such as staving off an economically harmful acquisition, we recommend a vote AGAINST Greenmail
proposals.
Anti-Greenmail Proposals:
Shareholder interests are best protected if they can vote on specific issues based
on the individual merits of each, rather than make sweeping generalizations about certain types of proposals. Therefore, we recommend a vote AGAINST broad charters and bylaw amendments such as anti-greenmail proposals.
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Increased Authorized Common Stock:
Requests to authorize increases in common stock
can be expected from time-to-time, and when handled in a disciplined manner such requests can be for beneficial purposes such as stock splits, cost-effective means of raising capital, or reasonable incentive programs. However, increases in common
stock can easily become dilutive, so by no means are they always in the best interest of shareholders. Purpose and scale are the determining factors with respect to increases in common stock, and based on these factors proposals to increase
authorized common stock should be decided on a case-by-case basis.
Reincorporation:
Reincorporation may be supported
where satisfactory business reasons are specified and there is no overall and significant detrimental impact. Because of the issues involved, such determinations should be made on a case-by-case basis.
Insider Trading:
We encourage companies to establish strict zero tolerance policies with respect to illegal insider trading activity,
and therefore would recommend a vote FOR proposals of such policies.
Approving Other Business:
Management may, on
occasion, seek broad authorization to approve business resolution without shareholder consent. Management typically already has the authority needed to make routine business decisions, so shareholders should avoid granting blanket authority to
management, which may reduce management accountability and/or shareholders rights. These proposals should be made on a case-by-case basis.
High-Performance Workplaces:
Pursuant to a 1994 Department of Labor report entitled “Road to High-Performance Workplaces,” some corporations may propose policies with respect to aspects of
high-performance workplaces, such as employee training, empowerment, or incentive programs. To the extent that such proposals can be seen to contribute to a company’s productivity and long-term financial performance we recommend a vote FOR
high-performance workplace proposals.
Corporate Responsibility:
Increasingly, issues of Corporate Responsibility are
appearing on proxy ballots. Investors must recognize that such issues are often more than just social questions—the immediate cost of implementing a new program must be weighed against the longer-term costs of pursuing abusive or unsound
policies. It must be remembered that the shareholder activism on the rise, companies that do not make an effort to be responsible corporate citizens may find their stocks out of favor. Also, there may be legal or regulatory costs to irresponsible
practices, which represent undefined liabilities. Therefore, where the financial impact of the proposal is positive to neutral, we recommend a vote FOR proposals which lower the potential for boycotts, lawsuits, or regulatory penalties. Examples may
include:
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Resolution to establish shareholder advisory committees
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Corporate conduct and human rights policies
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Adoption of the “MacBride Principles” of equal employment
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Adoption of “CERES Principles” of environmental responsibility
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Legal and regulatory compliance policies
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Each of the above will have a specific set of circumstances in which the financial impact of adoption the resolution must be evaluated, and
the analyst should vote according to the long-terms economic interests of shareholders.
FOREIGN SECURITIES
The Advisor will make best efforts to obtain and vote foreign proxies, as long as the cost of doing so does not outweigh the benefit of
voting. For example, the Advisor most likely will not travel to foreign countries to vote proxies. While the international proxies generally follow the same guidelines listed above, there are several issues which are not normally a part of the
domestic proxies and as such are addressed separately below.
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STANDARD INTERNATIONAL ISSUES
Receiving Financials:
We recommend voting FOR such routine, non-controversial items. Most companies around the world submit their
financials to shareholders for approval, and this is one of the first items on most agendas. When evaluating a company’s financial statements, unless there are major concerns about the accuracy of the financial statements, we would vote FOR
this item.
Accepting the acts or performance of the managing board or supervisory board:
We recommend voting FOR such
items. The annual formal discharge of board and management represents shareholder approval of actions taken during the year. Discharge is a vote of confidence in the company’s management and policies. It does not necessarily eliminate the
possibility of future shareholder action, but it does make such action more difficult to pursue. Meeting agendas normally list proposals to discharge both the board and management as one agenda item.
Discharge is generally granted unless a shareholder states a specific reason for withholding discharge and plans to undertake legal action.
Withholding discharge is a serious matter and is advisable only when a shareholder has concrete evidence of negligence or abuse on the part of the board or management, has plans to take legal action, or has knowledge of other shareholders’
plans to take legal action.
NON-STANDARD INTERNATIONAL ISSUES
Capital Increase per the following:
1. with rights, 2. without rights, 3. bonds with rights, or 4. bond without rights. In the
majority of cases, we would vote FOR capital increases. There may be cases where the analyst deems the capital increase inappropriate and would then vote AGAINST such an item.
Companies can have one of two types of capital systems. The authorized capital system sets a limit in a company’s articles on the total number of shares that can be issued by the company’s board.
The system allows companies to issue shares from this pre-approved limit, although in many markets shareholder approval must be obtained prior to an issuance. Companies also request shareholder approval for increases in authorization when the amount
of shares contained in the articles is inadequate for issuance authorities. When looking at such issues, we need to review the following: the history of issuance requests; the size of the request; and the purpose of the issuance associated with the
increase in authorization.
Under the conditional capital system, companies seek authorizations for pools of capital with fixed
periods of availability. If a company seeks to establish a pool of capital for general issuance purposes, it requests the creation of a certain number of shares with or without preemptive rights, issuable piecemeal at the discretion of the board for
a fixed period of time. Unissued shares lapse after the fixed time period expires. This type of authority would be used to carry out general rights issue or small issuances without preemptive rights.
Requests for a specific issuance authority are tied to a specific transaction or purpose, such as an acquisition or the servicing of
convertible securities. Such authorities cannot be used for any purpose other than that specified in the authorization. This pool of conditional capital also carries a fixed expiration date.
In reviewing these proposals, we need to look at the existence of pools of capital from previous years. Because most capital authorizations
are for several years, new requests may be made on top of the existing pool of capital. While most requests contain a provision to eliminate earlier pools and replace them with the current request, this is not always the case. Thus, if existing
pools of capital are being left in place, the total potential dilution amount from all capital should be considered.
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French Law requires that French companies ask for poison pills:
As covered under the
Domestic Non-Standard Poison Pill, we vote AGAINST poison pills. French anti-takeover mechanisms include staggered boards, super-voting shares, poison pills, and special shares. The most common anti-takeover maneuvers are voting rights restrictions
and shares with double voting rights. In the case of recently privatized companies, the government may hold a golden share that entitles it to override certain key decisions.
Some companies propose to authorize the board to issue stock in the event of a takeover bid. Such an issuance is not designed to increase capital beyond the amount authorized by other resolutions, but is
merely an alternative use for pools of capital already approved but unused. We oppose anti-takeover mechanisms, as they limit shareholder value by eliminating the takeover or control premium for the company. As owners of the company, shareholders
should be given the opportunity to decide on the merits of takeover offers.
Some companies use restricted voting rights to
protect themselves from takeovers. Companies can also implement time-phased double voting rights (usually granted after two to four years). This requires amending the articles and thus is subject to shareholder approval. Another popular defensive
tool is a pact that gives a small group of shareholders preemptive rights over one another’s shares. The Advisor supports the harmonization of share classes and opposes mechanisms that skew voting rights.
An anti-takeover device of concern to shareholders is the government’s ability to hold a golden share in newly privatized companies.
Under the terms of most golden shares, the government reserves the right to appoint two non-voting representatives to the board and also has the right to oppose any sale of assets if it is determined to adversely affect national interest. This
practice has become more controversial in the recent past since the European Commission determined that the use of golden shares may infringe on the free movement of capital and may only be used under certain circumstances.
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Recommendations for ERISA Plans
ERISA states that the named fiduciary has a duty to periodically monitor the activities of the investment manager; this includes proxy
voting. ERISA further requires proper documentation of the proxy voting activities of the investment manager and of investment manager monitoring by the named fiduciary. To aid trustees in fulfilling these duties, Manning & Napier
recommends the following:
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A review of your plan documents should be conducted to determine if voting authority has been delegated to the investment manager or retained by the
trustee. If the document does not delegate authority, it is the Department of Labor’s view that the investment manager has the responsibility with respect to the trustee (Pension and Welfare Benefits Administration, U.S. Department of Labor,
Proxy Project Report, March 2, 1989).
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If voting authority is delegated to Manning & Napier, we recommend that the Board adopt the proxy policy* outlined below. If voting authority
has been reserved to the Board, we recommend that the Board adopt its own proxy policy similar to that of Manning & Napier.
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We recommend that our Proxy Procedures be kept on file to document our compliance with the record keeping requirements.
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In order to assist clients with the ERISA monitoring requirement, upon written request we will provide a Proxy Report which will outline the
securities voted, what the issues were, what actions were taken and, in the case of a vote against the recommendation of management, we will provide the analyst’s reason for that vote.
*PROXY POLICY
In accordance with the guidelines of the U.S. Department
of Labor it is our policy regarding proxies to:
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Delegate the voting authority to the investment manager who will discharge it duties prudently, solely in the interest of the plan participants and
beneficiaries and for the exclusive purpose of providing benefits to plan participants and their beneficiaries.
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Require that the investment manager maintain accurate records as to the voting of such proxies that will enable us to review periodically the voting
procedures employed and the actions taken in individual situations.
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PROXY PAPER GUIDELINES
2012 PROXY SEASON
AN OVERVIEW OF
THE GLASS LEWIS APPROACH TO
PROXY ADVICE
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DIRECTORS
The purpose of Glass Lewis’ proxy research and advice is to facilitate shareholder voting in favor of governance structures that will
drive performance, create shareholder value and maintain a proper tone at the top. Glass Lewis looks for talented boards with a record of protecting shareholders and delivering value over the medium- and long-term. We believe that boards working to
protect and enhance the best interests of shareholders are independent, have directors with diverse backgrounds, have a record of positive performance, and have members with a breadth and depth of relevant experience.
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The independence of directors, or lack thereof, is ultimately demonstrated through the decisions they make. In assessing the independence of directors, we will take into consideration, when appropriate,
whether a director has a track record indicative of making objective decisions. Likewise, when assessing the independence of directors we will also examine when a director’s service track record on multiple boards indicates a lack of objective
decision-making. Ultimately, we believe the determination of whether a director is independent or not must take into consideration both compliance with the applicable independence listing requirements as well as judgments made by the director.
We look at each director nominee to examine the director’s relationships with the company, the company’s executives,
and other directors. We do this to evaluate whether personal, familial, or financial relationships (not including director compensation) may impact the director’s decisions. We believe that such relationships make it difficult for a director to
put shareholders’ interests above the director’s or the related party’s interests. We also believe that a director who owns more than 20% of a company can exert disproportionate influence on the board and, in particular, the audit
committee.
Thus, we put directors into three categories based on an examination of the type of relationship they have with the
company:
Independent Director
– An independent director has no material financial, familial or other current relationships with the company, its executives, or other board members, except for board service and standard fees paid
for that service. Relationships that existed within three to five years
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before the inquiry are usually considered “current” for purposes of this test.
In our view, a director who is currently serving in an interim management position should be considered an insider, while a director who previously served in an interim management position for less than one
year and is no longer serving in such capacity is considered independent. Moreover, a director who previously served in an interim management position for over one year and is no longer serving in such capacity is considered an affiliate for five
years following the date of his/her resignation or departure from the interim management position. Glass Lewis applies a three-year look-back period to all directors who have an affiliation with the company other than former employment, for which we
apply a five-year look-back.
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NASDAQ originally proposed a five-year look-back period but both it and the NYSE ultimately settled on a three-year look-back prior to finalizing their rules. A five-year standard is more appropriate,
in our view, because we believe that the unwinding of conflicting relationships between former management and board members is more likely to be com-plete and final after five years. However, Glass Lewis does not apply the five-year look-back period
to directors who have previously served as executives of the company on an interim basis for less than one year.
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Affiliated Director
– An affiliated director has a material financial, familial or other relationship with the company or its executives, but is not an employee of the company.
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This includes directors whose employers have a material financial
relationship with the company.
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In addition, we view a director
who owns or controls 20% or more of the company’s voting stock as an affiliate.
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We view 20% shareholders as affiliates because they typically have
access to and involvement with the management of a company that is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from those of ordinary holders, for reasons such as the
liquidity (or lack thereof) of their holdings, personal tax issues, etc.
Definition of
“Material”
: A material relationship is one in which the dollar value exceeds:
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as a director, including professional or other services; or
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$120,000 (or where no amount is disclosed) for those directors employed by a professional services firm such as a law firm, investment bank, or consulting
firm where the company pays the firm, not the individual, for services. This dollar limit would also apply to charitable contributions to schools where a board member is a professor; or charities where a director serves on the board or is an
executive;
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and any aircraft and real estate dealings between
the company and the director’s firm; or
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1% of either company’s consolidated gross revenue for other business relationships (e.g., where the director is an executive officer of a company
that provides services or products to or receives services or products from the company).
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Definition of
“Familial”
: Familial relationships include a person’s spouse, parents, children, siblings, grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone (other than domestic employees) who shares
such person’s home. A director is an affiliate if the director has a family member who is employed by the company and who receives compensation of $120,000 or more per year or the compensation is not disclosed.
Definition of
“Company”
: A company includes any parent or subsidiary in a group with the company or any entity that merged with, was acquired by, or acquired the company.
Inside Director
– An inside director simultaneously serves as a director and as an employee of the company. This category may include a chairman of the board who acts as an employee of the company or is paid as an
employee of the company. In our view, an inside director who derives
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If a company classifies one of its non-employee directors as
non-independent, Glass Lewis will classify that director as an affiliate.
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We allow a five-year grace period for former executives of the company or
merged companies who have consulting agreements with the surviving company. (We do not automatically recommend voting against directors in such cases for the first five years.) If the consulting agreement persists after this five-year grace period,
we apply the materiality thresholds outlined in the definition of “material.”
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This includes a director who serves on a board as a representative (as part
of his or her basic responsibilities) of an investment firm with greater than 20% ownership. However, while we will generally consider him/her to be affiliated, we will not recommend voting against unless (i) the investment firm has
disproportionate board representation or (ii) the director serves on the audit committee.
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We will generally take into consideration the size and nature of such
charitable entities in relation to the company’s size and industry along with any other relevant factors such as the director’s role at the charity. However, unlike for other types of related party transactions, Glass Lewis generally does
not apply a look-back period to affiliated relationships involving charitable contributions; if the relationship ceases, we will consider the director to be independent.
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a greater amount of income as a result of affiliated transactions with the
company rather than through compensation paid by the company (i.e., salary, bonus, etc. as a company employee) faces a conflict between making decisions that are in the best interests of the company versus those in the director’s own best
interests. Therefore, we will recommend voting against such a director.
Voting
Recommendations on the Basis of Board Independence
Glass Lewis believes a board will be most effective in
protecting shareholders’ interests if it is at least two-thirds independent. We note that each of the Business Roundtable, the Conference Board, and the Council of Institutional Investors advocates that two-thirds of the board be independent.
Where more than one-third of the members are affiliated or inside directors, we typically
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recommend voting against some of the inside and/or affiliated directors in order to satisfy the two-thirds threshold.
In the case of a less than two-thirds independent board, Glass Lewis strongly supports the existence of a presiding or lead
director with authority to set the meeting agendas and to lead sessions outside the insider chairman’s presence.
In addition, we scrutinize avowedly “independent” chairmen and lead directors. We believe that they should be unquestionably independent or the company should not tout them as such.
Committee Independence
We believe that only independent directors should serve on a company’s audit, compensation, nominating, and governance
committees.
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We typically recommend that shareholders vote
against any affiliated or inside director seeking appointment to an audit, compensation, nominating, or governance committee, or who has served in that capacity in the past year.
Independent Chairman
Glass Lewis believes that separating the roles of CEO (or, more rarely, another executive position) and chairman creates a
better governance structure than a combined CEO/chairman position. An executive manages the business according to a course the board charts. Executives should report to the board regarding their performance in achieving goals the board set. This is
needlessly complicated when a CEO chairs the board, since a CEO/chairman presumably will have a significant influence over the board.
It can become difficult for a board to fulfill its role of overseer and policy setter when a CEO/ chairman controls the agenda and the boardroom discussion. Such control can allow a CEO to have an entrenched
position, leading to longer-than-optimal terms, fewer checks on management, less scrutiny of the business operation, and limitations on independent, shareholder-focused goal-setting by the board.
A CEO should set the strategic course for the company, with the board’s approval, and the board should enable the CEO
to carry out the CEO’s vision for accomplishing the board’s objectives.
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With a staggered board, if the affiliates or insiders that we believe
should not be on the board are not up for election, we will express our concern regarding those directors, but we will not recommend voting against the other affiliates or insiders who are up for election just to achieve two-thirds independence.
However, we will consider recommending voting against the directors subject to our concern at their next election if the concerning issue is not resolved.
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We will recommend
voting against an audit committee member who owns 20% or more of the company’s stock, and we believe that there should be a maximum of one director (or no directors if the committee is comprised of less than three directors) who owns 20% or
more of the company’s stock on the compensation, nominating, and governance committees.
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Failure to achieve the board’s objectives should lead the board to
replace that CEO with someone in whom the board has confidence.
Likewise, an independent chairman can better
oversee executives and set a pro-shareholder agenda without the management conflicts that a CEO and other executive insiders often face. Such oversight and concern for shareholders allows for a more proactive and effective board of directors that is
better able to look out for the interests of shareholders.
Further, it is the board’s responsibility to
select a chief executive who can best serve a company and its shareholders and to replace this person when his or her duties have not been appropriately fulfilled. Such a replacement becomes more difficult and happens less frequently when the chief
executive is also in the position of overseeing the board.
Glass Lewis believes that the installation of an
independent chairman is almost always a positive step from a corporate governance perspective and promotes the best interests of shareholders. Further, the presence of an independent chairman fosters the creation of a thoughtful and dynamic board,
not dominated by the views of senior management. Encouragingly, many companies appear to be moving in this direction—one study even indicates that less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent
as recently as 2002.
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Another study finds that 41 percent of
S&P 500 boards now separate the CEO and chairman roles, up from 26 percent in 2001, although the same study found that of those companies, only 21 percent have truly independent chairs.
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We do not recommend that shareholders vote against CEOs who chair the board. However, we typically encourage our clients to support separating the roles of chairman and CEO whenever that question is posed in
a proxy (typically in the form of a shareholder proposal), as we believe that it is in the long-term best interests of the company and its shareholders.
P
ERF
ORMANCE
The most crucial
test of a board’s commitment to the company and its shareholders lies in the actions of the board and its members. We look at the performance of these individuals as directors and executives of the company and of other companies where they have
served.
Voting Recommendations on the Basis of Performance
We disfavor directors who have a record of not fulfilling their responsibilities to shareholders at any company where they
have held a board or executive position. We typically recommend voting against:
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1.
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A director who fails to attend a minimum of 75% of board and applicable committee meetings, calculated in the aggregate.
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2.
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A director who belatedly fied a significant form(s) 4 or 5, or who has a pattern of late filings if the late filing was the director’s fault (we
look at these late filing situations on a case-by-case basis).
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8
Ken Favaro, Per-Ola Karlsson and Gary Neilson. “CEO Succession
2000-2009: A Decade of Convergence and Compression.” Booz & Company (from Strategy+Business, Issue 59, Summer 2010).
9
Spencer Stuart Board
Index, 2011, p. 6.
10
However, where a director has served for less than one full year, we will typically not recommend voting against for
failure to attend 75% of meetings. Rather, we will note the poor attendance with a recommendation to track this issue going forward. We will also refrain from recommending to vote against directors when the proxy discloses that the director missed
the meetings due to serious illness or other extenuating circumstances.
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A director who is also the CEO of a company where a serious and material restatement has occurred after the CEO had previously certified the
pre-restatement financial statements.
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A director who has received two against recommendations from Glass Lewis for identical reasons within the prior year at different companies (the same
situation must also apply at the company being analyzed).
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5.
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All directors who served on the board if, for the last three years, the company’s performance has been in the bottom quartile of the sector and
the directors have not taken reasonable steps to address the poor performance.
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Audit Committees and Performance
Audit committees play an integral role in overseeing the financial reporting process because “[v]ibrant and stable
capital markets depend on, among other things, reliable, transparent, and objective financial information to support an efficient and effective capital market process. The vital oversight role audit committees play in the process of producing
financial information has never been more important.”
11
When assessing an audit committee’s performance, we are aware that an audit committee does not prepare
financial statements, is not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers or the disclosures provided to investors. Rather, an audit committee member monitors and
oversees the process and procedures that management and auditors perform. The 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit committees stated it best:
A proper and well-functioning system exists, therefore, when the three main groups responsible for financial reporting
– the full board including the audit committee, financial management including the internal auditors, and the outside auditors – form a ‘three legged stool’ that supports responsible financial disclosure and active participatory
oversight. However, in the view of the Committee, the audit committee must be ‘first among equals’ in this process, since the audit committee is an extension of the full board and hence the ultimate monitor of the process.
Standards For Assessing The Audit Committee
For an audit committee to function effectively on investors’ behalf, it must include members with sufficient knowledge
to diligently carry out their responsibilities. In its audit and accounting recommendations, the Conference Board Commission on Public Trust and Private Enterprise said “members of the audit committee must be independent and have both knowledge
and experience in auditing financial matters.”
12
We are skeptical of audit committees where there are members that lack expertise as a Certified Public
Accountant (CPA), Chief Financial Officer (CFO) or corporate controller or similar experience. While we will not necessarily vote against members of an audit committee when such expertise is lacking, we are more likely to vote against committee
members when a problem such as a restatement occurs and such expertise is lacking.
11
“Audit Committee Effectiveness – What Works Best.”
PricewaterhouseCoopers. The Institute of Internal Auditors Research Foundation. 2005.
12
Commission on Public Trust and Private Enterprise. The Conference Board.
2003.
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Glass Lewis generally assesses audit committees against the decisions they
make with respect to their oversight and monitoring role. The quality and integrity of the financial statements and earnings reports, the completeness of disclosures necessary for investors to make informed decisions, and the effectiveness of the
internal controls should provide reasonable assurance that the financial statements are materially free from errors. The independence of the external auditors and the results of their work all provide useful information by which to assess the audit
committee.
When assessing the decisions and actions of the audit committee, we typically defer to its judgment
and would vote in favor of its members, but we would recommend voting against the following members under the following circumstances:
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All members of the audit committee when options were backdated, there is a lack of adequate controls in place, there was a resulting restatement, and
disclosures indicate there was a lack of documentation with respect to the option grants.
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The audit committee chair, if the audit committee does not have a financial expert or the committee’s financial expert does not have a
demonstrable financial background sufficient to understand the financial issues unique to public companies.
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The audit committee chair, if the audit committee did not meet at least four times during the year.
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The audit committee chair, if the committee has less than three members.
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Any audit committee member who sits on more than three public company audit committees, unless the audit committee member is a retired CPA, CFO,
controller or has similar experience, in which case the limit shall be four committees, taking time and availability into consideration including a review of the audit committee member’s attendance at all board and committee meetings.
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All members of an audit committee who are up for election and who served on the committee at the time of the audit, if audit and audit-related fees
total one-third or less of the total fees billed by the auditor.
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The audit committee chair when tax and/or other fees are greater than audit and audit-related fees paid to the auditor for more than one year in a row
(in which case we also recommend against ratification of the auditor).
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All members of an audit committee where non-audit fees include fees for tax services (including, but not limited to, such things as tax avoidance or
shelter schemes) for senior executives of the company. Such services are now prohibited by the Public Company Accounting Oversight Board (“PCAOB”).
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Where the recommendation is to vote against the committee chair but the chair is not up for election because the board is staggered, we do not recommend voting against the members of the committee who
are up for election; rather, we will simply express our concern with regard to the committee chair.
14
Glass Lewis may exempt certain audit committee members from the above
threshold if, upon further analysis of relevant factors such as the director’s experience, the size, industry-mix and location of the companies involved and the director’s attendance at all the companies, we can reasonably determine that
the audit committee member is likely not hindered by multiple audit committee commitments.
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All members of an audit committee that reappointed an auditor that we no longer consider to be independent for reasons unrelated to fee proportions.
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All members of an audit committee when audit fees are excessively low, especially when compared with other companies in the same industry.
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The audit committee
chair
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if the committee failed to put auditor ratification on
the ballot for shareholder approval. However, if the non-audit fees or tax fees exceed audit plus audit-related fees in either the current or the prior year, then Glass Lewis will recommend voting against the entire audit committee.
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All members of an audit committee where the auditor has resigned and reported that a section 10A
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letter has been issued.
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All members of an audit committee at a time when material accounting fraud occurred at the
company.
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All members of an audit committee at a time when annual and/or multiple quarterly financial statements had to be restated, and any of the following
factors apply:
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The restatement involves fraud or manipulation by insiders;
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The restatement is accompanied by an SEC inquiry or investigation;
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The restatement involves revenue recognition;
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•
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The restatement results in a greater than 5% adjustment to costs of goods sold, operating expense, or operating cash flows; or
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The restatement results in a greater than 5% adjustment to net income, 10% adjustment to assets or shareholders equity, or cash flows from financing or
investing activities.
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All members of an audit committee if the company repeatedly fails to file its financial reports in a timely fashion. For example, the company has filed
two or more quarterly or annual financial statements late within the last five quarters.
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All members of an audit committee when it has been disclosed that a law enforcement agency has charged the company and/or its employees with a
violation of the Foreign Corrupt Practices Act (FCPA).
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All members of an audit committee when the company has aggressive accounting policies and/or poor disclosure or lack of sufficient transparency in its
financial statements.
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All members of the audit committee when there is a disagreement with the auditor and the auditor resigns or is dismissed.
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In all cases, if the chair of the committee is not specified, we recommend voting against the director who has been on the committee the longest.
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Auditors are required to report all potential illegal acts to management and the audit committee unless they are clearly inconsequential in nature. If the audit committee or the board fails to take
appropriate action on an act that has been determined to be a violation of the law, the independent auditor is required to send a section 10A letter to the SEC. Such letters are rare and therefore we believe should be taken seriously.
17
Recent research indicates that revenue fraud now accounts for over 60% of SEC fraud cases, and that companies that engage in fraud experience significant negative abnormal stock price
declines—facing bankruptcy, delisting, and material asset sales at much higher rates than do non-fraud firms (Committee of Sponsoring Organizations of the Treadway Commission. “Fraudulent Financial Reporting: 1998-2007.” May
2010).
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All members of the audit committee if the contract with the auditor specifically limits the auditor’s liability to the company for damages.
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All members of the audit committee who served since the date of the company’s last annual meeting, and when, since the last annual meeting, the
company has reported a material weakness that has not yet been corrected, or, when the company has an ongoing material weakness from a prior year that has not yet been corrected.
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We also take a dim view of audit committee reports that are boilerplate, and which provide little or no information or
transparency to investors. When a problem such as a material weakness, restatement or late filings occurs, we take into consideration, in forming our judgment with respect to the audit committee, the transparency of the audit committee report.
Compensation Committee Performance
Compensation committees have the final say in determining the compensation of executives. This includes deciding the basis
on which compensation is determined, as well as the amounts and types of compensation to be paid. This process begins with the hiring and initial establishment of employment agreements, including the terms for such items as pay, pensions and
severance arrangements. It is important in establishing compensation arrangements that compensation be consistent with, and based on the long-term economic performance of, the business’s long-term shareholders returns.
Compensation committees are also responsible for the oversight of the transparency of compensation. This oversight includes
disclosure of compensation arrangements, the matrix used in assessing pay for performance, and the use of compensation consultants. In order to ensure the independence of the compensation consultant, we believe the compensation committee should only
engage a compensation consultant that is not also providing any services to the company or management apart from their contract with the compensation committee. It is important to investors that they have clear and complete disclosure of all the
significant terms of compensation arrangements in order to make informed decisions with respect to the oversight and decisions of the compensation committee.
Finally, compensation committees are responsible for oversight of internal controls over the executive compensation process. This includes controls over gathering information used to determine compensation,
establishment of equity award plans, and granting of equity awards. Lax controls can and have contributed to conflicting information being obtained, for example through the use of nonobjective consultants. Lax controls can also contribute to
improper awards of compensation such as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for bonus payments have not been met.
Central to understanding the actions of a compensation committee is a careful review of the Compensation Discussion and
Analysis (CD&A) report included in each company’s proxy. We review the CD&A in our evaluation of the overall compensation practices of a company, as overseen by the compensation committee. The CD&A is also integral to the evaluation
of compensation proposals at companies, such as advisory votes on executive compensation, which allow shareholders to vote on the compensation paid to a company’s top executives.
18
The Council of Institutional Investors. “Corporate Governance Policies,” p. 4, April 5, 2006; and “Letter from Council of Institutional Investors to the AICPA,”
November 8, 2006.
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When assessing the performance of compensation committees, we will
recommend voting against for the following:
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All members of the compensation committee who are up for election and served at the time of poor pay-for-performance (e.g., a company receives an F
grade in our pay-for-performance analysis) when shareholders are not provided with an advisory vote on executive compensation at the annual meeting.
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Any member of the compensation committee who has served on the compensation committee of at least two other public companies that received F grades in
our pay-for-performance model and who is also suspect at the company in question.
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The compensation committee chair if the company received two D grades in consecutive years in our pay-for-performance analysis, and if during the past
year the Company performed the same as or worse than its
peers.
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All members of the compensation committee (during the relevant time period) if the company entered into excessive employment agreements and/or
severance agreements.
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All members of the compensation committee when performance goals were changed (i.e., lowered) when employees failed or were unlikely to meet original
goals, or performance-based compensation was paid despite goals not being attained.
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All members of the compensation committee if excessive employee perquisites and benefits were allowed.
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The compensation committee chair if the compensation committee did not meet during the year, but should have (e.g., because executive compensation was
restructured or a new executive was hired).
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All members of the compensation committee when the company repriced options or completed a “self tender offer” without shareholder approval
within the past two years.
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All members of the compensation committee when vesting of in-the-money options is accelerated or when fully vested options are granted.
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All members of the compensation committee when option exercise prices were backdated. Glass Lewis will recommend voting against an executive director
who played a role in and participated in option backdating.
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All members of the compensation committee when option exercise prices were spring-loaded or otherwise timed around the release of material information.
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Where the recommendation is to vote against the committee chair and the chair is not up for election because the board is staggered, we do not recommend voting against any members of the committee who
are up for election; rather, we will simply express our concern with regard to the committee chair.
20
Where there are multiple CEOs in one year, we will consider not
recommending against the compensation committee but will defer judgment on compensation policies and practices until the next year or a full year after arrival of the new CEO. In addition, if a company provides shareholders with a say-on-pay
proposal and receives an F grade in our pay-for-performance model, we will recommend that shareholders only vote against the say-on-pay proposal rather than the members of the compensation committee, unless the company exhibits egregious practices.
However, if the company receives successive F grades, we will then recommend against the members of the compensation committee in addition to recommending voting against the say-on-pay proposal.
21
In cases where the company received two D grades in consecutive years, but during the past year the company performed better than its peers or improved from an F to a D grade year over year, we
refrain from recommending to vote against the compensation chair. In addition, if a company provides shareholders with a say-on-pay proposal in this instance, we will consider voting against the advisory vote rather than the compensation committee
chair unless the company exhibits unquestionably egregious practices.
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All members of the compensation committee when a new employment contract is given to an executive that does not include a clawback provision and the
company had a material restatement, especially if the restatement was due to fraud.
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The chair of the compensation committee where the CD&A provides insufficient or unclear information about performance metrics and goals, where the
CD&A indicates that pay is not tied to performance, or where the compensation committee or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets.
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All members of the compensation committee during whose tenure the committee failed to implement a shareholder proposal regarding a compensation-related
issue, where the proposal received the affirmative vote of a majority of the voting shares at a shareholder meeting, and when a reasonable analysis suggests that the compensation committee (rather than the governance committee) should have taken
steps to implement the request.
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All members of a compensation committee during whose tenure the committee failed to address shareholder concerns following majority shareholder
rejection of the say-on-pay proposal in the previous year. Where the proposal was approved but there was a significant shareholder vote (i.e., greater than 25% of votes cast) against the say-on-pay proposal in the prior year, if there is no evidence
that the board responded accordingly to the vote including actively engaging shareholders on this issue, we will also consider recommending voting against the chairman of the compensation committee or all members of the compensation committee,
depending on the severity and history of the compensation problems and the level of vote against.
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Nominating and Governance Committee Performance
The nominating and governance committee, as an agency for the shareholders, is responsible for the governance by the board
of the company and its executives. In performing this role, the board is responsible and accountable for selection of objective and competent board members. It is also responsible for providing leadership on governance policies adopted by the
company, such as decisions to implement shareholder proposals that have received a majority vote.
Consistent
with Glass Lewis’ philosophy that boards should have diverse backgrounds and members with a breadth and depth of relevant experience, we believe that nominating and governance committees should consider diversity when making director
nominations within the context of each specific company and its industry. In our view, shareholders are best served when boards make an effort to ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and
ethnicity, but also on the basis of geographic knowledge, industry experience and culture.
Regarding the
nominating and or governance committee, we will recommend voting against the following:
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In all other instances (i.e. a non-compensation-related shareholder proposal should have been implemented) we recommend that shareholders vote against the members of the governance committee.
23
Where we would recommend to vote against the committee chair but the chair is not up for election because the board is staggered, we do not recommend voting against any members of the committee who
are up for election; rather, we will simply express our concern regarding the committee chair
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All members of the governance committee
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during whose tenure the board failed to implement a shareholder proposal with a direct and substantial impact on
shareholders and their rights - i.e., where the proposal received enough shareholder votes (at least a majority) to allow the board to implement or begin to implement that proposal.
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Examples of these types of shareholder proposals are majority vote to elect directors and to declassify the board.
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The governance committee chair,
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when the chairman is not independent and an independent lead or presiding director has not been appointed.
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In the absence of a nominating committee, the governance committee chair when there are less than five or the whole nominating committee when there are
more than 20 members on the board.
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The governance committee chair, when the committee fails to meet at all during the year.
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The governance committee chair, when for two consecutive years the company provides what we consider to be “inadequate” related party
transaction disclosure (i.e. the nature of such transactions and/or the monetary amounts involved are unclear or excessively vague, thereby preventing an average shareholder from being able to reasonably interpret the independence status of multiple
directors above and beyond what the company maintains is compliant with SEC or applicable stock-exchange listing requirements).
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The governance committee chair, when during the past year the board adopted a forum selection clause (i.e. an exclusive forum provision)
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without shareholder approval, or, if the board is currently seeking
shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal.
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Regarding the nominating committee, we will recommend voting against the
following:
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All members of the nominating committee, when the committee nominated or renominated an individual who had a significant conflict of interest or whose
past actions demonstrated a lack of integrity or inability to represent shareholder interests.
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If the board does not have a governance committee (or a committee that
serves such a purpose), we recommend voting against the entire board on this basis.
25
Where a compensation-related shareholder proposal should have been
implemented, and when a reasonable analysis suggests that the members of the compensation committee (rather than the governance committee) bear the responsibility for failing to implement the request, we recommend that shareholders only vote against
members of the compensation committee.
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If the committee chair is not specified, we recommend voting against the director who has been on the committee the
longest. If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving board member serving on the committee.
27
We believe that one
independent individual should be appointed to serve as the lead or presiding director. When such a position is rotated among directors from meeting to meeting, we will recommend voting against as if there were no lead or presiding director.
28
A forum selection clause is a bylaw provision stipulating that a certain state, typically Delaware, shall be the exclusive forum for all intra-corporate disputes (e.g. shareholder derivative actions,
assertions of claims of a breach of fiduciary duty, etc.). Such a clause effectively limits a shareholder’s legal remedy regarding appropriate choice of venue and related relief offered under that state’s laws and rulings.
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Where we would recommend to vote against the committee chair but the chair is not up for election because the board is staggered, we do not recommend voting against any members of the committee who
are up for election; rather, we will simply express our concern regarding the committee chair.
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The nominating committee chair, if the nominating committee did not meet during the year, but should have (i.e., because new directors were nominated
or appointed since the time of the last annual meeting).
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In the absence of a governance committee, the nominating committee chair
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when the chairman is not independent, and an independent lead or presiding director has not been appointed.
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The nominating committee chair, when there are less than five or the whole nominating committee when there are more than 20 members on the
board.
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The nominating committee chair, when a director received a greater than 50% against vote the prior year and not only was the director not removed, but
the issues that raised shareholder concern were not corrected.
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Board-level Risk Management Oversight
Glass Lewis evaluates the risk management function of a public company board on a strictly case-by-case basis. Sound risk
management, while necessary at all companies, is particularly important at financial firms which inherently maintain significant exposure to financial risk. We believe such financial firms should have a chief risk officer reporting directly to the
board and a dedicated risk committee or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain strategies which involve a high level of exposure to financial risk. Similarly, since many non-financial firms
have significant hedging or trading strategies, including financial and non-financial derivatives, those firms should also have a chief risk officer and a risk committee.
Our views on risk oversight are consistent with those expressed by various regulatory bodies. In its December 2009 Final
Rule release on Proxy Disclosure Enhancements, the SEC noted that risk oversight is a key competence of the board and that additional disclosures would improve investor and shareholder understanding of the role of the board in the
organization’s risk management practices. The final rules, which became effective on February 28, 2010, now explicitly require companies and mutual funds to describe (while allowing for some degree of flexibility) the board’s role in
the oversight of risk.
When analyzing the risk management practices of public companies, we take note of any
significant losses or writedowns on financial assets and/or structured transactions. In cases where a company has disclosed a sizable loss or writedown, and where we find that the company’s board-level risk committee contributed to the loss
through poor oversight, we would recommend that shareholders vote against such committee members on that basis. In addition, in cases where a
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If the committee chair is not specified, we will recommend voting against
the director who has been on the committee the longest. If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving board member on the committee.
31
In the absence of both a governance and a nominating committee, we will recommend voting against the chairman of the board on this basis.
32
In the absence of both a governance and a nominating committee, we will recommend voting against the chairman of the board on this basis.
33
Considering that shareholder discontent clearly relates to the director who received a greater than 50% against vote rather than the nominating chair, we review the validity of the issue(s) that
initially raised shareholder concern, follow-up on such matters, and only recommend voting against the nominating chair if a reasonable analysis suggests that it would be most appropriate. In rare cases, we will consider recommending against the
nominating chair when a director receives a substantial (i.e., 25% or more) vote against based on the same analysis.
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company maintains a significant level of financial risk exposure but fails
to disclose any explicit form of board-level risk oversight (committee or otherwise)
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, we will consider recommending to vote against the chairman of the board on that basis. However, we generally would not recommend voting against a combined chairman/CEO except in egregious cases.
E
XPERIENCE
We find that a director’s past conduct is often indicative of future conduct and performance. We often find directors with a history of overpaying executives or of serving on boards where avoidable
disasters have occurred appearing at companies that follow these same patterns. Glass Lewis has a proprietary database of directors serving at over 8,000 of the most widely held U.S. companies. We use this database to track the performance of
directors across companies.
Voting Recommendations on the Basis of Director Experience
We typically recommend that shareholders vote against directors who have served on boards or as executives
of companies with records of poor performance, inadequate risk oversight, overcompensation, audit- or accounting-related issues, and/or other indicators of mismanagement or actions against the interests of shareholders.
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Likewise, we examine the backgrounds of those who serve on key board committees to ensure that they have the required skills
and diverse backgrounds to make informed judgments about the subject matter for which the committee is responsible.
O
THER
C
ONSIDERATIONS
In addition to the three key characteristics – independence,
performance, experience – that we use to evaluate board members, we consider conflict-of-interest issues as well as the size of the board of directors when making voting recommendations.
Conflicts of Interest
We believe board members should be wholly free of identifiable and substantial conflicts of interest, regardless of the overall level of independent directors on the board. Accordingly, we recommend that
shareholders vote against the following types of affiliated or inside directors:
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A CFO who is on the board: In our view, the CFO holds a unique position relative to financial reporting and disclosure to shareholders. Because of the
critical importance of financial disclosure and reporting, we believe the CFO should report to the board and not be a member of it.
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A director who is on an excessive number of boards: We will typically recommend voting against a director who serves as an executive officer of any
public company while serving on more than two other public company boards and any other director who serves on more than six public company boards typically receives an against recommendation from Glass Lewis. Academic literature suggests that one
board takes up approximately
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A committee responsible for risk management could be a dedicated risk committee, or another board committee, usually the audit committee but occasionally the finance committee, depending on a given
company’s board structure and method of disclosure. At some companies, the entire board is charged with risk management.
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We typically apply a three-year look-back to such issues and also research to see whether the responsible directors have been up for election since the time of the failure, and if so, we take into
account the percentage of support they received from shareholders.
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200 hours per year of each member’s time. We believe this limits the number of boards on which directors can effectively serve, especially
executives at other companies.
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Further, we note a recent study
has shown that the average number of outside board seats held by CEOs of S&P 500 companies is 0.6, down from 0.8 in 2006 and 1.2 in 2001.
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3.
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A director, or a director who has an immediate family member, providing material consulting or other material professional services to the company:
These services may include legal, consulting, or financial services. We question the need for the company to have consulting relationships with its directors. We view such relationships as creating conflicts for directors, since they may be forced
to weigh their own interests against shareholder interests when making board decisions. In addition, a company’s decisions regarding where to turn for the best professional services may be compromised when doing business with the professional
services firm of one of the company’s directors.
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4.
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A director, or a director who has an immediate family member, engaging in airplane, real estate, or similar deals, including perquisite-type grants
from the company, amounting to more than $50,000: Directors who receive these sorts of payments from the company will have to make unnecessarily complicated decisions that may pit their interests against shareholder interests.
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5.
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Interlocking directorships: CEOs or other top executives who serve on each other’s boards create an interlock that poses conflicts that should be
avoided to ensure the promotion of shareholder interests above all else.
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6.
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All board members who served at a time when a poison pill was adopted without shareholder approval within the prior twelve months.
39
In the event a board is classified and shareholders are therefore unable
to vote against all directors, we will recommend voting against the remaining directors the next year they are up for a shareholder vote.
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Size of the Board of Directors
While we do not
believe there is a universally applicable optimum board size, we do believe boards should have at least five directors to ensure sufficient diversity in decision-making and to enable the formation of key board committees with independent directors.
Conversely, we believe that boards with more than 20 members will typically suffer under the weight of “too many cooks in the kitchen” and have difficulty reaching consensus and making timely decisions. Sometimes the presence of too many
voices can make it difficult to draw on the wisdom and experience in the room by virtue of the need to limit the discussion so that each voice may be heard.
36
Our guidelines are similar to the standards set forth by the NACD in its
“Report of the NACD Blue Ribbon Commission on Director Professionalism,” 2001 Edition, pp. 14-15 (also cited approvingly by the Conference Board in its “Corporate Governance Best Practices: A Blueprint for the Post-Enron Era,”
2002, p. 17), which suggested that CEOs should not serve on more than 2 additional boards, persons with full-time work should not serve on more than 4 additional boards, and others should not serve on more than six boards.
37
Spencer Stuart Board Index, 2011, p. 8.
38
We do not apply a look-back period for this situation. The interlock
policy applies to both public and private companies. We will also evaluate multiple board interlocks among non-insiders (i.e. multiple directors serving on the same boards at other companies), for evidence of a pattern of poor oversight.
39
Refer to Section IV. Governance Structure and the Shareholder Franchise for further discussion of our policies regarding anti-takeover measures, including poison pills.
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To that end, we typically recommend voting against the chairman of the
nominating committee at a board with fewer than five directors. With boards consisting of more than 20 directors, we typically recommend voting against all members of the nominating committee (or the governance committee, in the absence of a
nominating committee).
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C
ONTROLLED
C
OMPANIES
Controlled companies present an exception to our independence recommendations. The board’s function is to protect shareholder
interests; however, when an individual or entity owns more than 50% of the voting shares, the interests of the majority of shareholders are the interests of that entity or individual. Consequently, Glass Lewis does not apply our usual two-thirds
independence rule and therefore we will not recommend voting against boards whose composition reflects the makeup of the shareholder population.
Independence Exceptions
The independence
exceptions that we make for controlled companies are as follows:
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1.
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We do not require that controlled companies have boards that are at least two-thirds independent. So long as the insiders and/or affiliates are
connected with the controlling entity, we accept the presence of non-independent board members.
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2.
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The compensation committee and nominating and governance committees do not need to consist solely of independent directors.
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a.
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We believe that standing nominating and corporate governance committees at controlled companies are unnecessary. Although having a committee charged with the duties of
searching for, selecting, and nominating independent directors can be beneficial, the unique composition of a controlled company’s shareholder base makes such committees weak and irrelevant.
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b.
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Likewise, we believe that independent compensation committees at controlled companies are unnecessary. Although independent directors are the best choice for approving and
monitoring senior executives’ pay, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests. As such, we believe that having affiliated directors on a controlled company’s
compensation committee is acceptable. However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not serve on the compensation committee. Therefore, Glass Lewis will recommend voting
against any insider (the CEO or otherwise) serving on the compensation committee.
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3.
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Controlled companies do not need an independent chairman or an independent lead or presiding director. Although an independent director in a position
of authority on the board – such as chairman or presiding director – can best carry out the board’s duties, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests.
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The Conference Board, at p. 23 in its May 2003 report “Corporate Governance Best Practices, Id.,” quotes one of its roundtable participants as stating, “[w]hen you’ve got a 20 or
30 person corporate board, it’s one way of assuring that nothing is ever going to happen that the CEO doesn’t want to happen.”
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Size of the Board of Directors
We have no board size requirements for controlled companies.
Audit Committee Independence
We believe that audit committees should consist solely of independent directors. Regardless of a company’s controlled
status, the interests of all shareholders must be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors to oversee the preparation of financial reports could create an
insurmountable conflict of interest.
U
NOFFICIALLY
C
ONTROLLED
C
OMPANIES
AND
20-50% B
ENEFICIAL
O
WNERS
Where an individual or entity
owns more than 50% of a company’s voting power but the company is not a “controlled” company as defined by relevant listing standards, we apply a lower independence requirement of a majority of the board but believe the company should
otherwise be treated like another public company; we will therefore apply all other standards as outlined above.
Similarly,
where an individual or entity holds between 20-50% of a company’s voting power, but the company is not “controlled” and there is not a “majority” owner, we believe it is reasonable to allow proportional representation on the
board and committees (excluding the audit committee) based on the individual or entity’s percentage of ownership.
E
XCEPTIONS
FOR
R
ECENT
IPO
S
We believe companies that have
recently completed an initial public offering (“IPO”) should be allowed adequate time to fully comply with marketplace listing requirements as well as to meet basic corporate governance standards. We believe a one-year grace period
immediately following the date of a company’s IPO is sufficient time for most companies to comply with all relevant regulatory re-quirements and to meet such corporate governance standards. Except in egregious cases, Glass Lewis refrains from
issuing voting recommendations on the basis of corporate governance best practices (eg. board independence, committee membership and structure, meeting attendance, etc.) during the one-year period following an IPO.
However, two specific cases warrant strong shareholder action against the board of a company that completed an IPO within the past year:
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Adoption of a poison
pill
: in cases where a board implements a poison pill preceding an IPO, we will consider voting against the members of the board who served during the period of the poison pill’s adoption
if the board (i) did not also commit to submit the poison pill to a shareholder vote within 12 months of the IPO or (ii) did not provide a sound rationale for adopting the pill and the pill does not expire in three years or less. In our
view, adopting such an anti-takeover device unfairly penalizes future shareholders who (except for electing to buy or sell the stock) are unable to weigh in on a matter that could potentially negatively impact their ownership interest. This notion
is strengthened when a board adopts a poison pill with a 5-10 year life immediately prior to having a public shareholder base so as to insulate management for a substantial amount of time while postponing and/or avoiding allowing public shareholders
the ability to vote on the pill’s adoption. Such instances are indicative of boards that may subvert shareholders’ best interests following their IPO.
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2.
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Adoption of an exclusive forum provision
: consistent with our general approach to boards that adopt exclusive forum provisions without shareholder approval (refer to our discussion of nominating and governance committee performance in Section I of
the guidelines), in cases
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where a board adopts such a provision for inclusion in a company’s charter or bylaws before the company’s IPO, we will recommend voting against the chairman of the governance committee,
or, in the absence of such a committee, the chairman of the board, who served during the period of time when the provision was adopted.
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Further, shareholders should also be wary of companies in this category that adopt supermajority voting requirements before their IPO. Absent explicit provisions in the articles or bylaws stipulating that
certain policies will be phased out over a certain period of time (e.g. a predetermined declassification of the board, a planned separation of the chairman and CEO, etc.) long-term shareholders could find themselves in the predicament of having to
attain a supermajority vote to approve future proposals seeking to eliminate such policies.
M
UTUAL
F
UND
B
OARDS
Mutual funds, or investment companies, are structured differently from regular public companies (i.e., operating companies). Typically,
members of a fund’s adviser are on the board and management takes on a different role from that of regular public companies. Thus, we focus on a short list of requirements, although many of our guidelines remain the same.
The following mutual fund policies are similar to the policies for regular public companies:
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1.
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Size of the board of directors
: The board should be made up of between five and twenty directors.
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2.
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The CFO on the board
:
Neither the CFO of the fund nor the CFO of the fund’s registered investment adviser should serve on the board.
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3.
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Independence of the audit committee
: The audit committee should consist solely of independent directors.
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4.
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Audit committee financial expert
: At least one member of the audit committee should be designated as the audit committee financial expert.
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The following differences from regular public companies apply at mutual funds:
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1.
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Independence of the
board
: We believe that three-fourths of an investment company’s board should be made up of independent directors. This is consistent with a proposed SEC rule on investment company boards.
The Investment Company Act requires 40% of the board to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent. In 2005, the SEC proposed increasing the independence
threshold to 75%. In 2006, a federal appeals court ordered that this rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund boards play a vital role in overseeing the relationship
between the fund and its investment manager, there is greater need for independent oversight than there is for an operating company board.
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2.
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When the auditor is not up for ratification
: We do not recommend voting against the audit committee if the auditor is not up for ratification because, due to the different legal structure of an investment company compared to an operating company, the
auditor for the investment company (i.e., mutual fund) does not conduct the same level of financial review for each investment company as for an operating company.
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3.
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Non-independent chairman
:
The SEC has proposed that the chairman of the fund board be independent. We agree that the roles of a mutual fund’s chairman and CEO should be separate.
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Although we believe this would be best at all companies, we recommend
voting against the chairman of an investment company’s nominating committee as well as the chairman of the board if the chairman and CEO of a mutual fund are the same person and the fund does not have an independent lead or presiding director.
Seven former SEC commissioners support the appointment of an independent chairman and we agree with them that “an independent board chairman would be better able to create conditions favoring the long-term interests of fund shareholders than
would a chairman who is an executive of the adviser.” (See the comment letter sent to the SEC in support of the proposed rule at http://sec.gov/rules/proposed/s70304/ s70304-179.pdf)
DECLASSIFIED BOARDS
Glass Lewis favors the
repeal of staggered boards and the annual election of directors. We believe staggered boards are less accountable to shareholders than boards that are elected annually. Furthermore, we feel the annual election of directors encourages board members
to focus on shareholder interests.
Empirical studies have shown: (i) companies with staggered boards reduce a firm’s
value; and (ii) in the context of hostile takeovers, staggered boards operate as a takeover defense, which entrenches management, discourages potential acquirers, and delivers a lower return to target shareholders.
In our view, there is no evidence to demonstrate that staggered boards improve shareholder returns in a takeover context. Research shows
that shareholders are worse off when a staggered board blocks a transaction. A study by a group of Harvard Law professors concluded that companies whose staggered boards prevented a takeover “reduced shareholder returns for targets . on the
order of eight to ten percent in the nine months after a hostile bid was announced.”
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When a staggered board negotiates a friendly transaction, no statistically significant difference in premiums occurs.
42
Further, one of those same professors found that charter-based staggered boards “reduce the market value of a firm
by 4% to 6% of its market capitalization” and that “staggered boards bring about and not merely reflect this reduction in market value.”
43
A subsequent study reaffirmed that classified boards reduce shareholder value, finding “that the ongoing process of
dismantling staggered boards, encouraged by institutional investors, could well contribute to increasing shareholder wealth.”
44
Shareholders have increasingly come to agree with this view. In 2011 more than 75% of S&P 500 companies had declassified boards, up from
approximately 41% a decade ago.
45
Clearly, more shareholders
have supported the repeal of classified boards. Resolutions relating to the repeal of staggered boards garnered on average over 70% support among shareholders in 2008, whereas in 1987, only 16.4% of votes cast favored board declassificaton.
46
Given the empirical evidence suggesting staggered boards reduce a company’s value and the increasing shareholder opposition to such a structure, Glass Lewis supports the declassification of boards and
the annual election of directors.
41
Lucian Bebchuk, John Coates IV, Guhan Subramanian, “The Powerful Antitakeover Force of Staggered Boards: Further Findings and a Reply to Symposium Participants,” 55 Stanford Law Review
885-917 (2002), page 1.
42
Id. at 2 (“Examining a sample of seventy-three negotiated transactions from 2000 to 2002, we find no systematic
benefits in terms of higher premia to boards that have [staggered structures].”).
43
Lucian Bebchuk, Alma Cohen, “The Costs of Entrenched Boards”
(2004).
44
Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, “Staggered Boards and the Wealth of Shareholders: Evidence from a
Natural Experiment,” SSRN: http://ssrn.com/abstract=1706806 (2010), p. 26.
45
Spencer Stuart Board Index, 2011, p. 14
46
Lucian Bebchuk, John Coates IV and Guhan Subramanian, “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy,” 54 Stanford Law Review 887-951 (2002).
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MANDATORY DIRECTOR TERM AND AGE LIMITS
Glass Lewis believes that director age and term limits typically are not in shareholders’ best interests. Too often age and term limits
are used by boards as a crutch to remove board members who have served for an extended period of time. When used in that fashion, they are indicative of a board that has a difficult time making “tough decisions.”
Academic literature suggests that there is no evidence of a correlation between either length of tenure or age and director performance. On
occasion, term limits can be used as a means to remove a director for boards that are unwilling to police their membership and to enforce turnover. Some shareholders support term limits as a way to force change when boards are unwilling to do so.
While we understand that age limits can be a way to force change where boards are unwilling to make changes on their own, the
long-term impact of age limits restricts experienced and potentially valuable board members from service through an arbitrary means. Further, age limits unfairly imply that older (or, in rare cases, younger) directors cannot contribute to company
oversight.
In our view, a director’s experience can be a valuable asset to shareholders because of the complex, critical
issues that boards face. However, we support periodic director rotation to ensure a fresh perspective in the boardroom and the generation of new ideas and business strategies. We believe the board should implement such rotation instead of relying on
arbitrary limits. When necessary, shareholders can address the issue of director rotation through director elections.
We believe
that shareholders are better off monitoring the board’s approach to corporate governance and the board’s stewardship of company performance rather than imposing inflexible rules that don’t necessarily correlate with returns or
benefits for shareholders.
However, if a board adopts term/age limits, it should follow through and not waive such limits. If
the board waives its term/age limits, Glass Lewis will consider recommending shareholders vote against the nominating and/or governance committees, unless the rule was waived with sufficient explanation, such as consummation of a corporate
transaction like a merger.
REQUIRING TWO OR MORE NOMINEES PER BOARD SEAT
In an attempt to address lack of access to the ballot, shareholders sometimes propose that the board give shareholders a choice of directors
for each open board seat in every election. However, we feel that policies requiring a selection of multiple nominees for each board seat would discourage prospective directors from accepting nominations. A prospective director could not be
confident either that he or she is the board’s clear choice or that he or she would be elected. Therefore, Glass Lewis generally will vote against such proposals.
SHAREHOLDER ACCESS
We expect to see a
number of shareholder proposals regarding this topic in 2012. For a discussion of recent regulatory events in this area, along with a detailed overview of the Glass Lewis approach to Shareholder Proposals regarding Proxy Access, refer to
Section V. Compensation, Environmental, Social and Governance Shareholder Initiatives
.
MAJORITY VOTE FOR THE ELECTION OF DIRECTORS
In stark contrast to the failure of shareholder access to gain acceptance, majority voting for the election of directors is fast becoming
the de facto standard in corporate board elections. In our view, the majority voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis.
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While this proposal would not give shareholders the opportunity to nominate directors or
lead to elections where shareholders have a choice among director candidates, if implemented, the proposal would allow shareholders to have a voice in determining whether the nominees proposed by the board should actually serve as the
overseer-representatives of shareholders in the boardroom. We believe this would be a favorable outcome for shareholders.
During
2011, Glass Lewis tracked over 40 proposals seeking to require a majority vote to elect directors at annual meetings in the U.S., a slight increase over 2010 when we tracked just under 35 proposals, but a sharp contrast to the 147 proposals tracked
during 2006. The large drop in the number of proposals being submitted in recent years compared to 2006 is a result of many companies having already adopted some form of majority voting, including approximately 79% of companies in the S&P 500
index, up from 56% in 2008.
47
During 2009 these proposals
received on average 59% shareholder support (based on for and against votes), up from 54% in 2008.
T
HE
PLURALITY
VOTE
STANDARD
Today, most US companies still elect directors by a plurality vote standard. Under that standard, if one shareholder holding only one share
votes in favor of a nominee (including himself, if the director is a shareholder), that nominee “wins” the election and assumes a seat on the board. The common concern among companies with a plurality voting standard was the possibility
that one or more directors would not receive a majority of votes, resulting in “failed elections.” This was of particular concern during the 1980s, an era of frequent takeovers and contests for control of companies.
A
DVANTAGES
OF
A
MAJORITY
VOTE
STANDARD
If a majority vote standard were implemented, a nominee would have to receive the support of a majority
of the shares voted in order to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests. We think that this minimal amount of protection for shareholders is reasonable and will
not upset the corporate structure nor reduce the willingness of qualified shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more attentive directors. Occasional use of this power will likely prevent the
election of directors with a record of ignoring shareholder interests in favor of other interests that conflict with those of investors. Glass Lewis will generally support proposals calling for the election of directors by a majority vote except for
use in contested director elections.
In response to the high level of support majority voting has garnered, many companies have
voluntarily taken steps to implement majority voting or modified approaches to majority voting. These steps range from a modified approach requiring directors that receive a majority of withheld votes to resign (e.g., Ashland Inc.) to actually
requiring a majority vote of outstanding shares to elect directors (e.g., Intel).
We feel that the modified approach does not go
far enough because requiring a director to resign is not the same as requiring a majority vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate
governance committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the director’s replacement. And since the modified approach is usually adopted as a policy by the board or a
board committee, it could be altered by the same board or committee at any time.
47 Spencer Stuart Board Index, 2011, p. 14
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NTEGRITY
OF
F
INANCIAL
R
EPORTING
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AUDITOR RATIFICATION
The auditor’s role as gatekeeper is crucial in ensuring the integrity and transparency of the financial information necessary for
protecting shareholder value. Shareholders rely on the auditor to ask tough questions and to do a thorough analysis of a company’s books to ensure that the information provided to shareholders is complete, accurate, fair, and that it is a
reasonable representation of a company’s financial position. The only way shareholders can make rational investment decisions is if the market is equipped with accurate information about a company’s fiscal health. As stated in the
October 6, 2008 Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury:
“The auditor is expected to offer critical and objective judgment on the financial matters under consideration, and actual and perceived absence of conflicts is critical to that expectation. The
Committee believes that auditors, investors, public companies, and other market participants must understand the independence requirements and their objectives, and that auditors must adopt a mindset of skepticism when facing situations that may
compromise their independence.”
As such, shareholders should demand an objective, competent and diligent auditor who
performs at or above professional standards at every company in which the investors hold an interest. Like directors, auditors should be free from conflicts of interest and should avoid situations requiring a choice between the auditor’s
interests and the public’s interests. Almost without exception, shareholders should be able to annually review an auditor’s performance and to annually ratify a board’s auditor selection. Moreover, in October 2008, the Advisory
Committee on the Auditing Profession went even further, and recommended that “to further enhance audit committee oversight and auditor accountability . disclosure in the company proxy statement regarding shareholder ratification [should]
include the name(s) of the senior auditing partner(s) staffed on the engagement.”
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Most recently on August 16, 2011, the PCAOB issued a Concept Release seeking
public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced, with a specific emphasis on mandatory audit firm rotation. The PCAOB will convene a public roundtable meeting in March 2012 to further
discuss such matters. Glass Lewis believes auditor rotation can en-sure both the independence of the auditor and the integrity of the audit; we will typically recommend supporting proposals to require auditor rotation when the proposal uses a
reasonable period of time (usually not less than 5-7 years) particularly at companies with a history of accounting problems.
V
OTING
R
ECOMMENDATIONS
ON
A
UDITOR
R
ATIFICATION
We
generally support management’s choice of auditor except when we believe the auditor’s independence or audit integrity has been compromised. Where a board has not allowed shareholders to review and ratify an auditor, we typically recommend
voting against the audit committee chairman. When there have been material restatements of annual financial statements or material weakness in internal controls, we usually recommend voting against the entire audit committee.
Reasons why we may not recommend ratification of an auditor include:
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“Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury.” p. VIII:20, October 6, 2008.
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1.
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When audit fees plus audit-related fees total less than the tax fees and/or other non-audit fees.
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2.
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Recent material restatements of annual financial statements, including those resulting in the reporting of material weaknesses in internal controls and
including late filings by the company where the auditor bears some responsibility for the restatement or late
filing.
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3.
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When the auditor performs prohibited services such as tax-shelter work, tax services for the CEO or CFO, or contingent-fee work, such as a fee based on
a percentage of economic benefit to the company.
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4.
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When audit fees are excessively low, especially when compared with other companies in the same industry.
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5.
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When the company has aggressive accounting policies.
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6.
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When the company has poor disclosure or lack of transparency in its financial statements.
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7.
|
Where the auditor limited its liability through its contract with the company or the audit contract requires the corporation to use alternative dispute
resolution procedures without adequate justification.
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8.
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We also look for other relationships or concerns with the auditor that might suggest a conflict between the auditor’s interests and shareholder
interests.
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PENSION ACCOUNTING ISSUES
A pension accounting question often raised in proxy proposals is what effect, if any, projected returns on employee pension assets should
have on a company’s net income. This issue often arises in the executive-compensation context in a discussion of the extent to which pension accounting should be reflected in business performance for purposes of calculating payments to
executives.
Glass Lewis believes that pension credits should not be included in measuring income that is used to award
performance-based compensation. Because many of the assumptions used in accounting for retirement plans are subject to the company’s discretion, management would have an obvious conflict of interest if pay were tied to pension income. In our
view, projected income from pensions does not truly reflect a company’s performance.
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An auditor does not audit interim financial statements. Thus, we generally do not believe that an auditor should be opposed due to a restatement of interim financial statements unless the nature of
the misstatement is clear from a reading of the incorrect financial statements.
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III.
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HE
L
INK
B
ETWEEN
C
OMPENSATION
AND
P
ERFORMANCE
|
Glass Lewis carefully reviews the compensation awarded to senior executives, as we believe that
this is an important area in which the board’s priorities are revealed. Glass Lewis strongly believes executive compensation should be linked directly with the performance of the business the executive is charged with managing. We believe the
most effective compensation arrangements provide for an appropriate mix of performance-based short- and long-term incentives in addition to base salary.
Glass Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical to allowing shareholders to evaluate the extent to which the pay is keeping pace with company
performance. When reviewing proxy materials, Glass Lewis examines whether the company discloses the performance metrics used to determine executive compensation. We recognize performance metrics must necessarily vary depending on the company and
industry, among other factors, and may include items such as total shareholder return, earning per share growth, return on equity, return on assets and revenue growth. However, we believe companies should disclose why the specific performance
metrics were selected and how the actions they are designed to incentivize will lead to better corporate performance.
Moreover,
it is rarely in shareholders’ interests to disclose competitive data about individual salaries below the senior executive level. Such disclosure could create internal personnel discord that would be counterproductive for the company and its
shareholders. While we favor full disclosure for senior executives and we view pay disclosure at the aggregate level (e.g., the number of employees being paid over a certain amount or in certain categories) as potentially useful, we do not believe
shareholders need or will benefit from detailed reports about individual management employees other than the most senior executives.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (“SAY-ON-PAY”)
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) required most companies
50
to hold an advisory vote on executive compensation at the first shareholder meeting that occurs six months after
enactment of the bill (January 21, 2011).
This practice of allowing shareholders a non-binding vote on a company’s
compensation report is standard practice in many non-US countries, and has been a requirement for most companies in the United Kingdom since 2003 and in Australia since 2005. Although say-on-pay proposals are non-binding, a high level of
“against” or “abstain” votes indicate substantial shareholder concern about a company’s compensation policies and procedures.
Given the complexity of most companies’ compensation programs, Glass Lewis applies a highly nuanced approach when analyzing advisory votes on executive compensation. We review each company’s
compensation on a case-by-case basis, recognizing that each company must be examined in the context of industry, size, maturity, performance, financial condition, its historic pay for performance practices, and any other relevant internal or
external factors.
We believe that each company should design and apply specific compensation policies and practices that are
appropriate to the circumstances of the company and, in particular, will attract and retain competent executives and other staff, while motivating them to grow the company’s long-term shareholder value.
50
Small reporting companies (as defined by the SEC as below $75,000,000 in market capitalization) received a two-year reprieve and will only be subject to say-on-pay requirements beginning at meetings
held on or after January 21, 2013.
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Where we find those specific policies and practices serve to reasonably align compensation
with performance, and such practices are adequately disclosed, Glass Lewis will recommend supporting the company’s approach. If, however, those specific policies and practices fail to demonstrably link compensation with performance, Glass Lewis
will generally recommend voting against the say-on-pay proposal.
Glass Lewis focuses on four main areas when reviewing
Say-on-Pay proposals:
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The overall design and structure of the Company’s executive compensation program including performance metrics;
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The quality and content of the Company’s disclosure;
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The quantum paid to executives; and
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The link between compensation and performance as indicated by the Company’s current and past pay-for-performance grades
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We also review any significant changes or modifications, and rationale for such changes, made to the Company’s compensation structure
or award amounts, including base salaries.
S
AY
-
ON
-P
AY
V
OTING
R
ECOMMENDATIONS
In cases where we find deficiencies in a company’s compensation
program’s design, implementation or management, we will recommend that shareholders vote against the say-on-pay proposal. Generally such instances include evidence of a pattern of poor pay-for-performance practices (i.e., deficient or failing
pay for performance grades), unclear or questionable disclosure regarding the overall compensation structure (e.g., limited information regarding benchmarking processes, limited rationale for bonus performance metrics and targets, etc.),
questionable adjustments to certain aspects of the overall compensation structure (e.g., limited rationale for significant changes to performance targets or metrics, the payout of guaranteed bonuses or sizable retention grants, etc.), and/or other
egregious compensation practices.
Although not an exhaustive list, the following issues when weighed together may cause Glass
Lewis to recommend voting against a say-on-pay vote:
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Inappropriate peer group and/or benchmarking issues
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Inadequate or no rationale for changes to peer groups
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Egregious or excessive bonuses, equity awards or severance payments, including golden handshakes and golden parachutes
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Targeting overall levels of compensation at higher than median without adequate justification
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Bonus or long-term plan targets set at less than mean or negative performance levels
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Performance targets not sufficiently challenging, and/or providing for high potential payouts
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Performance targets lowered, without justification
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Discretionary bonuses paid when short- or long-term incentive plan targets were not met
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Executive pay high relative to peers not justified by outstanding company performance
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The terms of the long-term incentive plans are inappropriate (please see “Long-Term Incentives” below)
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In the instance that a company has simply failed to provide sufficient disclosure of its
policies, we may recommend shareholders vote against this proposal solely on this basis, regardless of the appropriateness of compensation levels.
A
DDITIONAL
S
CRUTINY
FOR
C
OMPANIES
WITH
S
IGNIFICANT
O
PPOSITION
IN
2011
At companies that received a significant shareholder vote (anything greater
than 25%) against their say on pay proposal in 2011, we believe the board should demonstrate some level of engagement and responsiveness to the shareholder concerns behind the discontent. While we recognize that sweeping changes cannot be made to a
compensation program without due consideration and that a majority of shareholders voted in favor of the proposal, we will look for disclosure in the proxy statement and other publicly-disclosed filings that indicates the compensation committee is
responding to the prior year’s vote results including engaging with large shareholders to identify the concerns causing the substantial vote against. In the absence of any evidence that the board is actively engaging shareholders on this issue
and responding accordingly, we will recommend holding compensation committee members accountable for a failure to respond in consideration of the level of the vote against and the severity and history of the compensation problems.
Where we identify egregious compensation practices, we may also recommend voting against the compensation committee based on the practices
or actions of its members during the year, such as approving large one-off payments, the inappropriate, unjustified use of discretion, or sustained poor pay for performance practices.
S
HORT
-T
ERM
I
NCENTIVES
A short-term bonus or incentive (“STI”) should be demonstrably tied to performance. Whenever possible, we believe a mix of corporate and individual performance measures is appropriate. We would
normally expect performance measures for STIs to be based on internal financial measures such as net profit after tax, EPS growth and divisional profitability as well as non-financial factors such as those related to safety, environmental issues,
and customer satisfaction. However, we accept variations from these metrics if they are tied to the Company’s business drivers.
Further, the target and potential maximum awards that can be achieved under STI awards should be disclosed. Shareholders should expect stretching performance targets for the maximum award to be achieved. Any
increase in the potential maximum award should be clearly justified to shareholders.
Glass Lewis recognizes that disclosure of
some measures may include commercially confidential information. Therefore, we believe it may be reasonable to exclude such information in some cases as long as the company provides sufficient justification for non-disclosure. However, where a
short-term bonus has been paid, companies should disclose the extent to which performance has been achieved against relevant targets, including disclosure of the actual target achieved.
Where management has received significant STIs but short-term performance as measured by such indicators as increase in profit and/or EPS
growth over the previous year prima facie appears to be poor or negative, we believe the company should provide a clear explanation why these significant short-term payments were made.
L
ONG
-T
ERM
I
NCENTIVES
Glass Lewis recognizes the value of equity-based incentive programs. When used appropriately, they can provide a vehicle for linking an executive’s pay to company performance, thereby aligning their
interests with those of shareholders. In addition, equity-based compensation can be an effective way to attract, retain and motivate key employees.
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There are certain elements that Glass Lewis believes are common to most well-structured
long-term incentive (“LTI”) plans. These include:
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No re-testing or lowering of performance conditions
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Performance metrics that cannot be easily manipulated by management
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Two or more performance metrics
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At least one relative performance metric that compares the company’s performance to a relevant peer group or index
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Performance periods of at least three years
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Stretching metrics that incentivize executives to strive for outstanding performance
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Individual limits expressed as a percentage of base salary
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Performance measures should be carefully selected and should relate to the specific business/industry in which the company operates and, especially, the key value drivers of the company’s business.
Glass Lewis believes that measuring a company’s performance with multiple metrics serves to provide a more complete picture
of the company’s performance than a single metric, which may focus too much management attention on a single target and is therefore more susceptible to manipulation. External benchmarks should be disclosed and transparent, such as total
shareholder return (“TSR”) against a well-selected sector index, peer group or other performance hurdle. The rationale behind the selection of a specific index or peer group should be disclosed. Internal benchmarks (e.g. earnings per share
growth) should also be disclosed and transparent, unless a cogent case for confidentiality is made and fully explained.
We also
believe shareholders should evaluate the relative success of a company’s compensation programs, particularly existing equity-based incentive plans, in linking pay and performance in evaluating new LTI plans to determine the impact of additional
stock awards. We will therefore review the company’s pay-for-performance grade, see below for more information, and specifically the proportion of total compensation that is stock-based.
P
AY
FOR
P
ERFORMANCE
Glass Lewis believes an integral part of a well-structured compensation package is a successful link between pay and performance. Therefore, Glass Lewis developed a proprietary pay-for-performance model to
evaluate the link between pay and performance of the top five executives at US companies. Our model benchmarks these executives’ pay and company performance against four peer groups and across seven performance metrics. Using a forced curve and
a school letter-grade system, we grade companies from A-F according to their pay-for-performance linkage. The grades guide our evaluation of compensation committee effectiveness and we generally recommend voting against compensation committee of
companies with a pattern of failing our pay-for-performance analysis.
We also use this analysis to inform our voting decisions
on say-on-pay proposals. As such, if a company receives a failing grade from our proprietary model, we are likely to recommend shareholders to vote against the say-on-pay proposal. However, there may be exceptions to this rule such as when a company
makes significant enhancements to its compensation programs.
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R
ECOUPMENT
(“C
LAWBACK
”)
P
ROVISIONS
Section 954 of the Dodd-Frank Act requires the SEC to create a rule requiring listed companies to
adopt policies for recouping certain compensation during a three-year look-back period. The rule applies to incentive-based compensation paid to current or former executives if the company is required to prepare an accounting restatement due to
erroneous data resulting from material non-compliance with any financial reporting requirements under the securities laws.
These
recoupment provisions are more stringent than under Section 304 of the Sarbanes-Oxley Act in three respects: (i) the provisions extend to current or former executive officers rather than only to the CEO and CFO; (ii) it has a three-year
look-back period (rather than a twelve-month look-back period); and (iii) it allows for recovery of compensation based upon a financial restatement due to erroneous data, and therefore does not require misconduct on the part of the executive or
other employees.
F
REQUENCY
OF
S
AY
-
ON
-P
AY
The Dodd-Frank Act also requires companies to allow shareholders a
non-binding vote on the frequency of say-on-pay votes, i.e. every one, two or three years. Additionally, Dodd-Frank requires companies to hold such votes on the frequency of say-on-pay votes at least once every six years.
We believe companies should submit say-on-pay votes to shareholders every year. We believe that the time and financial burdens to a company
with regard to an annual vote are relatively small and incremental and are outweighed by the benefits to shareholders through more frequent accountability. Implementing biannual or triennial votes on executive compensation limits shareholders’
ability to hold the board accountable for its compensation practices through means other than voting against the compensation committee. Unless a company provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than
annually, we will generally recommend that shareholders support annual votes on compensation.
V
OTE
ON
G
OLDEN
P
ARACHUTE
A
RRANGEMENTS
The Dodd-Frank Act also requires companies to provide shareholders with a separate non-binding vote on approval of golden
parachute compensation arrangements in connection with certain change-in-control transactions. However, if the golden parachute arrangements have previously been subject to a say-on-pay vote which shareholders approved, then this required vote is
waived.
Glass Lewis believes the narrative and tabular disclosure of golden parachute arrangements will benefit all
shareholders. Glass Lewis will analyze each golden parachute arrangement on a case-by-case basis, taking into account, among other items: the ultimate value of the payments particularly compared to the value of the transaction, the tenure and
position of the executives in question, and the type of triggers involved (single vs double).
EQUITY-BASED COMPENSATION PLAN PROPOSALS
We believe that equity compensation awards are useful, when not abused, for retaining employees and providing an incentive for them to act
in a way that will improve company performance. Glass Lewis evaluates equity-based compensation plans using a detailed model and analytical review.
Equity-based compensation programs have important differences from cash compensation plans and bonus programs. Accordingly, our model and analysis takes into account factors such as plan administration, the
method and terms of exercise, repricing history, express or implied rights to reprice, and the presence of evergreen provisions.
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Our analysis is primarily quantitative and focused on the plan’s cost as compared with
the business’s operating metrics. We run twenty different analyses, comparing the program with absolute limits we believe are key to equity value creation and with a carefully chosen peer group. In general, our model seeks to determine whether
the proposed plan is either absolutely excessive or is more than one standard deviation away from the average plan for the peer group on a range of criteria, including dilution to shareholders and the projected annual cost relative to the
company’s financial performance. Each of the twenty analyses (and their constituent parts) is weighted and the plan is scored in accordance with that weight.
In our analysis, we compare the program’s expected annual expense with the business’s operating metrics to help determine whether the plan is excessive in light of company performance. We also
compare the option plan’s expected annual cost to the enterprise value of the firm rather than to market capitalization because the employees, managers and directors of the firm contribute to the creation of enterprise value but not necessarily
market capitalization (the biggest difference is seen where cash represents the vast majority of market capitalization). Finally, we do not rely exclusively on relative comparisons with averages because, in addition to creeping averages serving to
inflate compensation, we believe that some absolute limits are warranted.
We evaluate equity plans based on certain overarching
principles:
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Companies should seek more shares only when needed.
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Requested share amounts should be small enough that companies seek shareholder approval every three to four years (or more frequently).
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If a plan is relatively expensive, it should not grant options solely to senior executives and board members.
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Annual net share count and voting power dilution should be limited.
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Annual cost of the plan (especially if not shown on the income statement) should be reasonable as a percentage of financial results and should be in
line with the peer group.
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The expected annual cost of the plan should be proportional to the business’s value.
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The intrinsic value that option grantees received in the past should be reasonable compared with the business’s financial results.
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Plans should deliver value on a per-employee basis when compared with programs at peer companies.
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Plans should not permit re-pricing of stock options.
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Plans should not contain excessively liberal administrative or payment terms.
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Selected performance metrics should be challenging and appropriate, and should be subject to relative performance measurements.
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Stock grants should be subject to minimum vesting and/or holding periods sufficient to ensure sustainable performance and promote retention.
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PTION
E
XCHANGES
Glass Lewis views option repricing plans and option exchange programs with great skepticism. Shareholders have substantial risk in owning
stock and we believe that the employees, officers, and directors who receive stock options should be similarly situated to align their interests with shareholder interests.
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We are concerned that option grantees who believe they will be “rescued” from
underwater options will be more inclined to take unjustifiable risks. Moreover, a predictable pattern of repricing or exchanges substantially alters a stock option’s value because options that will practically never expire deeply out of the
money are worth far more than options that carry a risk of expiration.
In short, repricings and option exchange programs change
the bargain between shareholders and employees after the bargain has been struck.
There is one circumstance in which a repricing
or option exchange program is acceptable: if macroeconomic or industry trends, rather than specific company issues, cause a stock’s value to decline dramatically and the repricing is necessary to motivate and retain employees. In this
circumstance, we think it fair to conclude that option grantees may be suffering from a risk that was not foreseeable when the original “bargain” was struck. In such a circumstance, we will recommend supporting a repricing only if the
following conditions are true:
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Officers and board members cannot participate in the program;
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The stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude;
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The exchange is value-neutral or value-creative to shareholders using very conservative assumptions and with a recognition of the adverse selection
problems inherent in voluntary programs; and
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Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market.
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O
PTION
B
ACKDATING
,
S
PRING
-L
OADING
,
AND
B
ULLET
-D
ODGING
Glass Lewis views
option backdating, and the related practices of spring-loading and bullet-dodging, as egregious actions that warrant holding the appropriate management and board members responsible. These practices are similar to re-pricing options and eliminate
much of the downside risk inherent in an option grant that is designed to induce recipients to maximize shareholder return.
Backdating an option is the act of changing an option’s grant date from the actual grant date to an earlier date when the market price
of the underlying stock was lower, resulting in a lower exercise price for the option. Since 2006, Glass Lewis has identified over 270 companies that have disclosed internal or government investigations into their past stock-option grants.
Spring-loading is granting stock options while in possession of material, positive information that has not been disclosed
publicly. Bullet-dodging is delaying the grants of stock options until after the release of material, negative information. This can allow option grants to be made at a lower price either before the release of positive news or following the release
of negative news, assuming the stock’s price will move up or down in response to the information. This raises a concern similar to that of insider trading, or the trading on material non-public information.
The exercise price for an option is determined on the day of grant, providing the recipient with the same market risk as an investor who
bought shares on that date. However, where options were backdated, the executive or the board (or the compensation committee) changed the grant date retroactively. The new date may be at or near the lowest price for the year or period. This would be
like allowing an investor to look back and select the lowest price of the year at which to buy shares.
A 2006 study of option
grants made between 1996 and 2005 at 8,000 companies found that option backdating can be an indication of poor internal controls. The study found that option backdating was more likely to occur at companies without a majority independent board and
with a long-serving CEO; both factors, the study concluded, were associated with greater CEO influence on the company’s compensation and governance practices.
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Where a company granted backdated options to an executive who is also a director, Glass
Lewis will recommend voting against that executive/director, regardless of who decided to make the award. In addition, Glass Lewis will recommend voting against those directors who either approved or allowed the backdating. Glass Lewis feels that
executives and directors who either benefited from backdated options or authorized the practice have breached their fiduciary responsibility to shareholders.
Given the severe tax and legal liabilities to the company from backdating, Glass Lewis will consider recommending voting against members of the audit committee who served when options were backdated, a
restatement occurs, material weaknesses in internal controls exist and disclosures indicate there was a lack of documentation. These committee members failed in their responsibility to ensure the integrity of the company’s financial reports.
When a company has engaged in spring-loading or bullet-dodging, Glass Lewis will consider recommending voting against the
compensation committee members where there has been a pattern of granting options at or near historic lows. Glass Lewis will also recommend voting against executives serving on the board who benefited from the spring-loading or bullet-dodging.
162(
M
) P
LANS
Section 162(m) of the Internal Revenue Code allows companies to deduct compensation in excess of $1 million for the CEO and the next three
most highly compensated executive officers, excluding the CFO, upon shareholder approval of the excess compensation. Glass Lewis recognizes the value of executive incentive programs and the tax benefit of shareholder-approved incentive plans.
We believe the best practice for companies is to provide robust disclosure to shareholders so that they can make fully-informed
judgments about the reasonableness of the proposed compensation plan. To allow for meaningful shareholder review, we prefer that disclosure should include specific performance metrics, a maximum award pool, and a maximum award amount per employee.
We also believe it is important to analyze the estimated grants to see if they are reasonable and in line with the company’s peers.
We typically recommend voting against a 162(m) plan where: a company fails to provide at least a list of performance targets; a company fails to provide one of either a total pool or an individual maximum;
or the proposed plan is excessive when compared with the plans of the company’s peers.
The company’s record of
aligning pay with performance (as evaluated using our proprietary pay-for-performance model) also plays a role in our recommendation. Where a company has a record of setting reasonable pay relative to business performance, we generally recommend
voting in favor of a plan even if the plan caps seem large relative to peers because we recognize the value in special pay arrangements for continued exceptional performance.
As with all other issues we review, our goal is to provide consistent but contextual advice given the specifics of the company and ongoing performance. Overall, we recognize that it is generally not in
shareholders’ best interests to vote against such a plan and forgo the potential tax benefit since shareholder rejection of such plans will not curtail the awards; it will only prevent the tax deduction associated with them.
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Lucian Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY CEOs.” November, 2006.
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D
IRECTOR
C
OMPENSATION
P
LANS
Glass Lewis believes that non-employee directors should receive reasonable and appropriate compensation for
the time and effort they spend serving on the board and its committees. Director fees should be competitive in order to retain and attract qualified individuals. But excessive fees represent a financial cost to the company and threaten to compromise
the objectivity and independence of non-employee directors. Therefore, a balance is required. We will consider recommending supporting compensation plans that include option grants or other equity-based awards that help to align the interests of
outside directors with those of shareholders. However, equity grants to directors should not be performance-based to ensure directors are not incentivized in the same manner as executives but rather serve as a check on imprudent risk-taking in
executive compensation plan design.
Glass Lewis uses a proprietary model and analyst review to evaluate the costs of equity
plans compared to the plans of peer companies with similar market capitalizations. We use the results of this model to guide our voting recommendations on stock-based director compensation plans.
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IV.
G
OVERNANCE
S
TRUCTURE
AND
THE
S
HAREHOLDER
F
RANCHISE
|
ANTI-TAKEOVER MEASURES
P
OISON
P
ILLS
(S
HAREHOLDER
R
IGHTS
P
LANS
)
Glass Lewis believes that poison pill plans are not generally in shareholders’ best interests. They
can reduce management accountability by substantially limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock. Typically we recommend that shareholders vote against
these plans to protect their financial interests and ensure that they have an opportunity to consider any offer for their shares, especially those at a premium.
We believe boards should be given wide latitude in directing company activities and in charting the company’s course. However, on an issue such as this, where the link between the shareholders’
financial interests and their right to consider and accept buyout offers is substantial, we believe that shareholders should be allowed to vote on whether they support such a plan’s implementation. This issue is different from other matters
that are typically left to board discretion. Its potential impact on and relation to shareholders is direct and substantial. It is also an issue in which management interests may be different from those of shareholders; thus, ensuring that
shareholders have a voice is the only way to safeguard their interests.
In certain circumstances, we will support a poison pill
that is limited in scope to accomplish a particular objective, such as the closing of an important merger, or a pill that contains what we believe to be a reasonable qualifying offer clause. We will consider supporting a poison pill plan if the
qualifying offer clause includes each of the following attributes:
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The form of offer is not required to be an all-cash transaction;
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The offer is not required to remain open for more than 90 business days;
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The offeror is permitted to amend the offer, reduce the offer, or otherwise change the terms;
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There is no fairness opinion requirement; and
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There is a low to no premium requirement.
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Where these requirements are met, we typically feel comfortable that shareholders will have the opportunity to voice their opinion on any legitimate offer.
NOL P
OISON
P
ILLS
Similarly, Glass Lewis may consider supporting a limited poison pill in the unique event that a company seeks shareholder approval of a
rights plan for the express purpose of preserving Net Operating Losses (NOLs). While companies with NOLs can generally carry these losses forward to offset future taxable income, Section 382 of the Internal Revenue Code limits companies’
ability to use NOLs in the event of a “change of ownership.”
52
In this case, a company may adopt or amend a poison pill (“NOL pill”) in order to prevent an inadvertent change of ownership by multiple investors purchasing small chunks of stock at the same
time, and thereby preserve the ability to carry the NOLs forward. Often such NOL pills have trigger thresholds much lower than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.
52
Section 382 of the Internal Revenue Code refers to a “change of ownership” of more than 50 percentage points by one or more 5% shareholders within a three-year period. The statute is
intended to deter the “trafficking” of net operating losses.
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Glass Lewis evaluates NOL pills on a strictly case-by-case basis taking into consideration,
among other factors, the value of the NOLs to the company, the likelihood of a change of ownership based on the size of the holding and the nature of the larger shareholders, the trigger threshold and whether the term of the plan is limited in
duration (i.e., whether it contains a reasonable “sunset” provision) or is subject to periodic board review and/or shareholder ratification. However, we will recommend that shareholders vote against a proposal to adopt or amend a pill to
include NOL protective provisions if the company has adopted a more narrowly tailored means of preventing a change in control to preserve its NOLs. For example, a company may limit share transfers in its charter to prevent a change of ownership from
occurring.
Furthermore, we believe that shareholders should be offered the opportunity to vote on any adoption or renewal of a
NOL pill regardless of any potential tax benefit that it offers a company. As such, we will consider recommending voting against those members of the board who served at the time when an NOL pill was adopted without shareholder approval within the
prior twelve months and where the NOL pill is not subject to shareholder ratification.
F
AIR
P
RICE
P
ROVISIONS
Fair price provisions, which are rare, require that certain minimum price and procedural requirements be observed by any party that acquires
more than a specified percentage of a corporation’s common stock. The provision is intended to protect minority shareholder value when an acquirer seeks to accomplish a merger or other transaction which would eliminate or change the interests
of the minority stockholders. The provision is generally applied against the acquirer unless the takeover is approved by a majority of “continuing directors” and holders of a majority, in some cases a supermajority as high as 80%, of the
combined voting power of all stock entitled to vote to alter, amend, or repeal the above provisions.
The effect of a fair price
provision is to require approval of any merger or business combination with an “interested stockholder” by 51% of the voting stock of the company, excluding the shares held by the interested stockholder. An interested stockholder is
generally considered to be a holder of 10% or more of the company’s outstanding stock, but the trigger can vary.
Generally,
provisions are put in place for the ostensible purpose of preventing a back-end merger where the interested stockholder would be able to pay a lower price for the remaining shares of the company than he or she paid to gain control. The effect of a
fair price provision on shareholders, however, is to limit their ability to gain a premium for their shares through a partial tender offer or open market acquisition which typically raise the share price, often significantly. A fair price provision
discourages such transactions because of the potential costs of seeking shareholder approval and because of the restrictions on purchase price for completing a merger or other transaction at a later time.
Glass Lewis believes that fair price provisions, while sometimes protecting shareholders from abuse in a takeover situation, more often act
as an impediment to takeovers, potentially limiting gains to shareholders from a variety of transactions that could significantly increase share price. In some cases, even the independent directors of the board cannot make exceptions when such
exceptions may be in the best interests of shareholders. Given the existence of state law protections for minority shareholders such as Section 203 of the Delaware Corporations Code, we believe it is in the best interests of shareholders to remove
fair price provisions.
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REINCORPORATION
In general, Glass Lewis believes that the board is in the best position to determine the appropriate jurisdiction of incorporation for the
company. When examining a management proposal to reincorporate to a different state or country, we review the relevant financial benefits, generally related to improved corporate tax treatment, as well as changes in corporate governance provisions,
especially those relating to shareholder rights, resulting from the change in domicile. Where the financial benefits are de minimis and there is a decrease in shareholder rights, we will recommend voting against the transaction.
However, costly, shareholder-initiated reincorporations are typically not the best route to achieve the furtherance of shareholder rights.
We believe shareholders are generally better served by proposing specific shareholder resolutions addressing pertinent issues which may be implemented at a lower cost, and perhaps even with board approval. However, when shareholders propose a shift
into a jurisdiction with enhanced shareholder rights, Glass Lewis examines the significant ways would the Company benefit from shifting jurisdictions including the following:
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Is the board sufficiently independent?
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2.
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Does the Company have anti-takeover protections such as a poison pill or classified board in place?
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3.
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Has the board been previously unresponsive to shareholders (such as failing to implement a shareholder proposal that received majority shareholder
support)?
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4.
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Do shareholders have the right to call special meetings of shareholders?
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5.
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Are there other material governance issues at the Company?
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6.
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Has the Company’s performance matched or exceeded its peers in the past one and three years?
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7.
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How has the Company ranked in Glass Lewis’ pay-for-performance analysis during the last three years?
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8.
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Does the company have an independent chairman?
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9.
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We note, however, that we will only support shareholder proposals to change a company’s place of incorporation in exceptional circumstances.
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EXCLUSIVE FORUM PROVISIONS
Glass Lewis believes that charter or bylaw provisions limiting a shareholder’s choice of legal venue are not in the best interests of
shareholders. Such clauses may effectively discourage the use of shareholder derivative claims by increasing their associated costs and making them more difficult to pursue. As such, shareholders should be wary about approving any limitation on
their legal recourse including limiting themselves to a single jurisdiction (e.g. Delaware) without compelling evidence that it will benefit shareholders.
For this reason, we recommend that shareholders vote against any bylaw or charter amendment seeking to adopt an exclusive forum provision. Moreover, in the event a board seeks shareholder approval of a forum
selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal, we will weigh the importance of the other bundled provisions when determining the vote recommendation on the proposal. We will nonetheless recommend voting
against the chairman of the governance committee for bundling disparate proposals into a single proposal (refer to our discussion of nominating and governance committee performance in Section I of the guidelines).
AUTHORIZED SHARES
Glass Lewis believes that adequate capital stock is important to a company’s operation. When analyzing a request for additional shares, we typically review four common reasons why a company might need
additional capital stock:
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Stock Split
– We
typically consider three metrics when evaluating whether we think a stock split is likely or necessary: The historical stock pre-split price, if any; the current price relative to the company’s most common trading price over the past 52 weeks;
and some absolute limits on stock price that, in our view, either always make a stock split appropriate if desired by management or would almost never be a reasonable price at which to split a stock.
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2.
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Shareholder Defenses
– Additional authorized shares could be used to bolster takeover defenses such as a poison pill. Proxy filings often discuss the usefulness of additional shares in defending against or discouraging a hostile takeover as a reason for a requested
increase. Glass Lewis is typically against such defenses and will oppose actions intended to bolster such defenses.
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3.
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Financing for
Acquisitions
– We look at whether the company has a history of using stock for acquisitions and attempt to determine what levels of stock have typically been required to accomplish such
transactions. Likewise, we look to see whether this is discussed as a reason for additional shares in the proxy.
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4.
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Financing for Operations
– We review the company’s cash position and its ability to secure financing through borrowing or other means. We look at the company’s history of capitalization and whether the company has had to use stock in the recent past as a
means of raising capital.
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Issuing additional shares can dilute existing holders in limited circumstances.
Further, the availability of additional shares, where the board has discretion to implement a poison pill, can often serve as a deterrent to interested suitors. Accordingly, where we find that the company has not detailed a plan for use of the
proposed shares, or where the number of shares far exceeds those needed to accomplish a detailed plan, we typically recommend against the authorization of additional shares.
While we think that having adequate shares to allow management to make quick decisions and effectively operate the business is critical, we prefer that, for significant transactions, management come to
shareholders to justify their use of additional shares rather than providing a blank check in the form of a large pool of unallocated shares available for any purpose.
ADVANCE NOTICE REQUIREMENTS
We typically
recommend that shareholders vote against proposals that would require advance notice of shareholder proposals or of director nominees.
These proposals typically attempt to require a certain amount of notice before shareholders are allowed to place proposals on the ballot. Notice requirements typically range between three to six months prior
to the annual meeting. Advance notice requirements typically make it impossible for a shareholder who misses the deadline to present a shareholder proposal or a director nominee that might be in the best interests of the company and its
shareholders.
We believe shareholders should be able to review and vote on all proposals and director nominees. Shareholders can
always vote against proposals that appear with little prior notice. Shareholders, as owners of a business, are capable of identifying issues on which they have sufficient information and ignoring issues on which they have insufficient information.
Setting arbitrary notice restrictions limits the opportunity for shareholders to raise issues that may come up after the window closes.
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VOTING STRUCTURE
C
UMULATIVE
V
OTING
Cumulative voting increases the ability of minority shareholders to elect a director by allowing shareholders to cast as many shares of the
stock they own multiplied by the number of directors to be elected. As companies generally have multiple nominees up for election, cumulative voting allows shareholders to cast all of their votes for a single nominee, or a smaller number of nominees
than up for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is controlled by insiders or affiliates and where the company’s ownership structure includes
one or more shareholders who control a majority-voting block of company stock.
Glass Lewis believes that cumulative voting
generally acts as a safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all
shareholders rather than just a small group of large holders.
However, academic literature indicates that where a highly
independent board is in place and the company has a shareholder-friendly governance structure, shareholders may be better off without cumulative voting. The analysis underlying this literature indicates that shareholder returns at firms with good
governance structures are lower and that boards can become factionalized and prone to evaluating the needs of special interests over the general interests of shareholders collectively.
We review cumulative voting proposals on a case-by-case basis, factoring in the independence of the board and the status of the
company’s governance structure. But we typically find these proposals on ballots at companies where independence is lacking and where the appropriate checks and balances favoring shareholders are not in place. In those instances we typically
recommend in favor of cumulative voting.
Where a company has adopted a true majority vote standard (i.e., where a director must
receive a majority of votes cast to be elected, as opposed to a modified policy indicated by a resignation policy only), Glass Lewis will recommend voting against cumulative voting proposals due to the incompatibility of the two election methods.
For companies that have not adopted a true majority voting standard but have adopted some form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted antitakeover
protections and has been responsive to shareholders.
Where a company has not adopted a majority voting standard and is facing
both a shareholder proposal to adopt majority voting and a shareholder proposal to adopt cumulative voting, Glass Lewis will support only the majority voting proposal. When a company has both majority voting and cumulative voting in place, there is
a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more
directors for whom shareholders do not cumulate votes.
S
UPERMAJORITY
V
OTE
R
EQUIREMENTS
Glass Lewis believes that supermajority vote requirements impede shareholder
action on ballot items critical to shareholder interests. An example is in the takeover context, where supermajority vote requirements can strongly limit the voice of shareholders in making decisions on such crucial matters as selling the business.
This in turn degrades share value and can limit the possibility of buyout premiums to shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority
shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.
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TRANSACTION OF OTHER BUSINESS
We typically recommend that shareholders not give their proxy to management to vote on any other business items that may properly come
before an annual or special meeting. In our opinion, granting unfettered discretion is unwise.
ANTI-GREENMAIL PROPOSALS
Glass Lewis will support proposals to adopt a provision preventing the payment of greenmail, which would serve to prevent companies from buying back company stock at significant premiums from a certain
shareholder. Since a large or majority shareholder could attempt to compel a board into purchasing its shares at a large premium, the anti-greenmail provision would generally require that a majority of shareholders other than the majority
shareholder approve the buyback.
MUTUAL FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its investment advisor
or sub-advisors are generally best left to management and the members of the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. As such, we focus our analyses of such proposals on the following main areas:
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•
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The terms of any amended advisory or sub-advisory agreement;
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•
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Any changes in the fee structure paid to the investment advisor; and
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•
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Any material changes to the fund’s investment objective or strategy.
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We generally support amendments to a fund’s investment advisory agreement absent a material change that is not in the best interests of
shareholders. A significant increase in the fees paid to an investment advisor would be reason for us to consider recommending voting against a proposed amendment to an investment advisory agreement. However, in certain cases, we are more inclined
to support an increase in advisory fees if such increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements between a fund’s advisor and sub-advisor, primarily because the
fees received by the sub-advisor are paid by the advisor, and not by the fund.
In matters pertaining to a fund’s investment
objective or strategy, we believe shareholders are best served when a fund’s objective or strategy closely resembles the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally
recommend voting against amendments to a fund’s investment objective or strategy when the proposed changes would leave shareholders with stakes in a fund that is noticeably different than when originally contemplated, and which could therefore
potentially negatively impact some investors’ diversification strategies.
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V.
C
OMPENSATION
, E
NVIRONMENTAL
, S
OCIAL
AND
G
OVERNANCE
S
HAREHOLDER
I
NITIATIVES
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Glass Lewis typically prefers to leave decisions regarding day-to-day management and policy
decisions, including those related to social, environmental or political issues, to management and the board, except when there is a clear link between the proposal and value enhancement or risk mitigation. We feel strongly that shareholders should
not attempt to micromanage the company, its businesses or its executives through the shareholder initiative process. Rather, we believe shareholders should use their influence to push for governance structures that protect shareholders and promote
director accountability. Shareholders should then put in place a board they can trust to make informed decisions that are in the best interests of the business and its owners, and then hold directors accountable for management and policy decisions
through board elections. However, we recognize that support of appropriately crafted shareholder initiatives may at times serve to promote or protect shareholder value.
To this end, Glass Lewis evaluates shareholder proposals on a case-by-case basis. We generally recommend supporting shareholder proposals calling for the elimination of, as well as to require shareholder
approval of, antitakeover devices such as poison pills and classified boards. We generally recommend supporting proposals likely to increase and/or protect shareholder value and also those that promote the furtherance of shareholder rights. In
addition, we also generally recommend supporting proposals that promote director accountability and those that seek to improve compensation practices, especially those promoting a closer link between compensation and performance.
The following is a discussion of Glass Lewis’ approach to certain common shareholder resolutions. We note that the following is not an
exhaustive list of all shareholder proposals.
COMPENSATION
Glass Lewis carefully reviews executive compensation since we believe that this is an important area in which the board’s priorities
and effectiveness are revealed. Executives should be compensated with appropriate base salaries and incentivized with additional awards in cash and equity only when their performance and that of the company warrants such rewards. Compensation,
especially when also in line with the compensation paid by the company’s peers, should lead to positive results for shareholders and ensure the use of appropriate incentives that drives those results over time.
However, as a general rule, Glass Lewis does not believe shareholders should be involved in the approval and negotiation of compensation
packages. Such matters should be left to the board’s compensation committee, which can be held accountable for its decisions through the election of directors. Therefore, Glass Lewis closely scrutinizes shareholder proposals relating to
compensation to determine if the requested action or disclosure has already accomplished or mandated and whether it allows sufficient, appropriate discretion to the board to design and implement reasonable compensation programs.
D
ISCLOSURE
OF
I
NDIVIDUAL
C
OMPENSATION
Glass Lewis believes that disclosure of information regarding compensation is critical to allowing shareholders to evaluate the extent to
which a company’s pay is based on performance. However, we recognize that the SEC currently mandates significant executive compensation disclosure. In some cases, providing information beyond that which is required by the SEC, such as the
details of individual employment agreements of employees below the senior level, could create internal personnel tension or put the company at a competitive disadvantage, prompting employee poaching by competitors. Further, it is difficult to see
how this information would be beneficial to shareholders. Given these concerns, Glass Lewis typically does not believe that shareholders would benefit from additional disclosure of
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individual compensation packages beyond the significant level that is already required; we therefore typically recommend voting against shareholder proposals seeking such detailed disclosure. We
will, however, review each proposal on a case by basis, taking into account the company’s history of aligning executive compensation and the creation of shareholder value.
L
INKING
P
AY
WITH
P
ERFORMANCE
Glass Lewis views performance-based compensation as an effective means of motivating executives to act in the best interests of shareholders. In our view, an executive’s compensation should be specific
to the company and its performance, as well as tied to the executive’s achievements within the company.
However, when firms
have inadequately linked executive compensation and company performance we will consider recommending supporting reasonable proposals seeking that a percentage of equity awards be tied to performance criteria. We will also consider supporting
appropriately crafted proposals requesting that the compensation committee include multiple performance metrics when setting executive compensation, provided that the terms of the shareholder proposal are not overly prescriptive. Though boards often
argue that these types of restrictions unduly hinder their ability to attract talent we believe boards can develop an effective, consistent and reliable approach to remuneration utilizing a wide range (and an appropriate mix) of fixed and
performance-based compensation.
R
ETIREMENT
B
ENEFITS
&
S
EVERANCE
As a general rule, Glass Lewis believes that shareholders should not be involved in the approval of
individual severance plans. Such matters should be left to the board’s compensation committee, which can be held accountable for its decisions through the election of its director members.
However, when proposals are crafted to only require approval if the benefit exceeds 2.99 times the amount of the executive’s base
salary plus bonus, Glass Lewis typically supports such requests. Above this threshold, based on the executive’s average annual compensation for the most recent five years, the company can no longer deduct severance payments as an expense, and
thus shareholders are deprived of a valuable benefit without an offsetting incentive to the executive. We believe that shareholders should be consulted before relinquishing such a right, and we believe implementing such policies would still leave
companies with sufficient freedom to enter into appropriate severance arrangements.
Following the passage of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-Frank”), the SEC proposed rules that would require that public companies hold advisory shareholder votes on compensation arrangements and understandings in connection with merger
transactions, also known as “golden parachute” transactions. Effective April 4, 2011, the SEC requires that companies seeking shareholder approval of a merger or acquisition transaction must also provide disclosure of certain
“golden parachute” compensation arrangements and, in certain circumstances, conduct a separate shareholder advisory vote to approve golden parachute compensation arrangements.
B
ONUS
R
ECOUPMENTS
(“C
LAWBACKS
”)
We believe it is prudent for boards to adopt detailed and stringent policies whereby, in the event of a restatement of financial results, the board will review all performance related bonuses and awards made
to senior executives during the period covered by a restatement and will, to the extent feasible, recoup such bonuses to the extent that performance goals were not achieved. While the Dodd-Frank Act mandates that all companies adopt clawback
policies that will require companies to develop a policy to recover compensation paid to current and former executives erroneously paid during the three year prior to a restatement, the SEC has yet to finalize the relevant rules. As a result, we
expect to see shareholder proposals regarding clawbacks in the upcoming proxy season.
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When examining proposals requesting that companies adopt recoupment policies, Glass Lewis
will first review any relevant policies currently in place. When the board has already committed to a proper course, and the current policy covers the major tenets of the proposal, we see no need for further action. Further, in some instances,
shareholder proposals may call for board action that contravenes legal obligations under existing employment agreements. In other cases proposals may excessively limit the board’s ability to exercise judgment and reasonable discretion, which
may or may not be warranted, depending on the specific situation of the company in question. We believe it is reasonable that a mandatory recoupment policy should only affect senior executives and those directly responsible for the company’s
accounting errors.
We note that where a company is entering into a new executive employment contract that does not include a
clawback provision and the company has had a material restatement in the recent past, Glass Lewis will recommend voting against the responsible members of the compensation committee. The compensation committee has an obligation to shareholders to
include reasonable controls in executive contracts to prevent payments in the case of inappropriate behavior.
G
OLDEN
C
OFFINS
Glass Lewis does not believe that the payment of substantial, unearned
posthumous compensation provides an effective incentive to executives or aligns the interests of executives with those of shareholders. Glass Lewis firmly believes that compensation paid to executives should be clearly linked to the creation of
shareholder value. As such, Glass Lewis favors compensation plans centered on the payment of awards contingent upon the satisfaction of sufficiently stretching and appropriate performance metrics. The payment of posthumous unearned and unvested
awards should be subject to shareholder approval, if not removed from compensation policies entirely. Shareholders should be skeptical regarding any positive benefit they derive from costly payments made to executives who are no longer in any
position to affect company performance.
To that end, we will consider supporting a reasonably crafted shareholder proposal
seeking to prohibit, or require shareholder approval of, the making or promising of any survivor benefit payments to senior executives’ estates or beneficiaries. We will not recommend supporting proposals that would, upon passage, violate
existing contractual obligations or the terms of compensation plans currently in effect.
R
ETENTION
OF
S
HARES
UNTIL
R
ETIREMENT
We strongly support the linking of executive pay to the creation of long-term sustainable shareholder value and therefore
believe shareholders should encourage executives to retain some level of shares acquired through equity compensation programs to provide continued alignment with shareholders. However, generally we do not believe that requiring senior executives to
retain all or an unduly high percentage of shares acquired through equity compensation programs following the termination of their employment is the most effective or desirable way to accomplish this goal. Rather, we believe that restricting
executives’ ability to exercise all or a supermajority of otherwise vested equity awards until they leave the company may hinder the ability of the compensation committee to both attract and retain executive talent. In our view, otherwise
qualified and willing candidates could be dissuaded from accepting employment if he/she believes that his/her compensation could be dramatically affected by financial results unrelated to their own personal performance or tenure at the company.
Alternatively, an overly strict policy could encourage existing employees to quit in order to realize the value locked in their incentive awards. As such, we will not typically recommend supporting proposals requiring the retention of significant
amounts of equity compensation following termination of employment at target firms.
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T
AX
G
ROSS
-U
PS
Tax gross-ups can act as an anti-takeover measure, as larger payouts to executives result in larger gross-ups, which could
artificially inflate the ultimate purchase price under a takeover or merger scenario. Additionally, gross-ups can result in opaque compensation packages where shareholders are unlikely to be aware of the total compensation an executive may receive.
Further, we believe that in instances where companies have severance agreements in place for executives, payments made pursuant to such arrangements are often large enough to soften the blow of any additional excise taxes. Finally, such payments are
not performance based, providing no incentive to recipients and, if large, can be a significant cost to companies.
Given the
above, we will typically recommend supporting proposals requesting that a compensation committee adopt a policy that it will not make or promise to make to its senior executives any tax gross-up payments, except those applicable to management
employees of the company generally, such as a relocation or expatriate tax equalization policy.
L
INKING
E
XECUTIVE
P
AY
TO
E
NVIRONMENTAL
AND
S
OCIAL
C
RITERIA
We recognize that a company’s involvement in
environmentally sensitive and labor-intensive industries influences the degree to which a firm’s overall strategy must weigh environmental and social concerns. However, we also understand that the value generated by incentivizing executives to
prioritize environmental and social issues is difficult to quantify and therefore measure, and necessarily varies among industries and companies.
When reviewing such proposals seeking to tie executive compensation to environmental or social practices, we will review the target firm’s compliance with (or contravention of) applicable laws and
regulations, and examine any history of environmental and social related concerns including those resulting in material investigations, lawsuits, fines and settlements. We will also review the firm’s current compensation policies and practice.
However, with respect to executive compensation, Glass Lewis generally believes that such policies should be left to the compensation committee.
GOVERNANCE
D
ECLASSIFICATION
OF
THE
B
OARD
Glass Lewis believes that classified boards (or “staggered boards”) do not serve the best interests of shareholders. Empirical
studies have shown that: (i) companies with classified boards may show a reduction in firm value; (ii) in the context of hostile takeovers, classified boards operate as a takeover defense, which entrenches management, discourages potential
acquirers and delivers less return to shareholders; and (iii) companies with classified boards are less likely to receive takeover bids than those with single class boards. Annual election of directors provides increased accountability and
requires directors to focus on the interests of shareholders. When companies have classified boards shareholders are deprived of the right to voice annual opinions on the quality of oversight exercised by their representatives.
Given the above, Glass Lewis believes that classified boards are not in the best interests of shareholders and will continue to recommend
shareholders support proposals seeking their repeal.
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R
IGHT
OF
S
HAREHOLDERS
TO
C
ALL
A
S
PECIAL
M
EETING
Glass Lewis strongly believes that shareholders should have the ability to call meetings of shareholders between annual meetings to consider
matters that require prompt attention. However, in order to prevent abuse and waste of corporate resources by a small minority of shareholders, we believe that shareholders representing at least a sizable minority of shares must support such a
meeting prior to its calling. Should the threshold be set too low, companies might frequently be subjected to meetings whose effect could be the disruption of normal business operations in order to focus on the interests of only a small minority of
owners. Typically we believe this threshold should not fall below 10-15% of shares, depending on company size.
In our
case-by-case evaluations, we consider the following:
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Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
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•
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Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards,
etc.) and reaction to shareholder proposals
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•
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Company performance and steps taken to improve bad performance (e.g., new executives/ directors, spin-offs, etc.)
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•
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Existence of anti-takeover protections or other entrenchment devices
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•
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Opportunities for shareholder action (e.g., ability to act by written consent)
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•
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Existing ability for shareholders to call a special meeting
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R
IGHT
OF
S
HAREHOLDERS
TO
A
CT
BY
W
RITTEN
C
ONSENT
Glass Lewis strongly supports shareholders’ right to act by written consent. The right to act by
written consent enables shareholders to take action on important issues that arise between annual meetings. However, we believe such rights should be limited to at least the minimum number of votes that would be necessary to authorize the action at
a meeting at which all shareholders entitled to vote were present and voting.
In addition to evaluating the threshold for which
written consent may be used (e.g. majority of votes cast or outstanding), we will consider the following when evaluating such shareholder proposals:
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Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.)
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•
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Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards,
etc.) and reaction to shareholder proposals
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Company performance and steps taken to improve bad performance (e.g., new executives/ directors, spin offs, etc.)
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•
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Existence of anti-takeover protections or other entrenchment devices
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•
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Opportunities for shareholder action (e.g., ability and threshold to call a special meeting)
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Existing ability for shareholders to act by written consent
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B
OARD
C
OMPOSITION
Glass Lewis believes the selection and screening process for identifying suitably qualified candidates for a company’s board of
directors is one which requires the judgment of many factors, including the balance of skills and talents, the breadth of experience and diversity of candidates and existing board members. Diversity of skills, abilities and points of view can foster
the development of a more creative, effective and dynamic board. In general, however, we do not believe that it is in the best interests of shareholders for firms to be beholden to arbitrary rules regarding its board, or committee, composition. We
believe such matters should be left to a board’s nominating committee, which is generally responsible for establishing and implementing policies regarding the composition of the board. Members of this committee may be held accountable through
the director election process. However, we will consider supporting reasonable, well-crafted proposals to increase board diversity where there is evidence a board’s lack of diversity lead to a decline in shareholder value.
R
EIMBURSEMENT
OF
S
OLICITATION
E
XPENSES
Where a dissident shareholder is seeking reimbursement for expenses incurred in waging a contest or submitting a shareholder proposal and
has received the support of a majority of shareholders, Glass Lewis generally will recommend in favor of reimbursing the dissident for reasonable expenses. In those rare cases where a shareholder has put his or her own time and money into organizing
a successful campaign to unseat a poorly performing director (or directors) or sought support for a shareholder proposal, we feel that the shareholder should be entitled to reimbursement of expenses by other shareholders, via the company. We believe
that, in such cases, shareholders express their agreement by virtue of their majority vote for the dissident (or the shareholder proposal) and will share in the expected improvement in company performance.
M
AJORITY
V
OTE
FOR
THE
E
LECTION
OF
D
IRECTORS
If a majority vote standard were implemented, shareholders could collectively vote to
reject a director they believe will not pursue their best interests. We think that this minimal amount of protection for shareholders is reasonable and will not upset the corporate structure nor reduce the willingness of qualified
shareholder-focused directors to serve in the future.
We believe that a majority vote standard will likely lead to more
attentive directors. Further, occasional use of this power will likely prevent the election of directors with a record of ignoring shareholder interests. Glass Lewis will generally support shareholder proposals calling for the election of directors
by a majority vote, except for use in contested director elections.
C
UMULATIVE
V
OTE
FOR
THE
E
LECTION
OF
D
IRECTORS
Glass Lewis believes that cumulative voting generally acts as a safeguard for shareholders by ensuring that those who hold a significant
minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders. However, when a company has both
majority voting and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could
unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.
Given the above,
where a company (i) has adopted a true majority vote standard; (ii) has simultaneously proposed a management-initiated true majority vote standard; or (iii) is simultaneously the target of a true majority vote standard shareholder
proposal, Glass Lewis will recommend voting against cumulative voting proposals due to the potential incompatibility of the two election methods.
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For companies that have not adopted a true majority voting standard but have adopted some
form of majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted antitakeover protections and has been responsive to shareholders.
S
UPERMAJORITY
V
OTE
R
EQUIREMENTS
We believe that a simple majority is appropriate to approve all matters presented to shareholders, and will recommend that shareholders vote
accordingly. Glass Lewis believes that supermajority vote requirements impede shareholder action on ballot items critical to shareholder interests. In a takeover context supermajority vote requirements can strongly limit the voice of shareholders in
making decisions on crucial matters such as selling the business. These limitations in turn may degrade share value and can reduce the possibility of buyout premiums for shareholders. Moreover, we believe that a supermajority vote requirement can
enable a small group of shareholders to overrule the will of the majority of shareholders.
I
NDEPENDENT
C
HAIRMAN
Glass Lewis views an independent chairman as better able to oversee the executives and set a pro-shareholder agenda in the absence of the
conflicts that a CEO, executive insider, or close company affiliate may face. Separating the roles of CEO and chairman may lead to a more proactive and effective board of directors. The presence of an independent chairman fosters the creation of a
thoughtful and dynamic board, not dominated by the views of senior management. We believe that the separation of these two key roles eliminates the conflict of interest that inevitably occurs when a CEO, or other executive, is responsible for
self-oversight. As such, we will typically support reasonably crafted shareholder proposals seeking the installation of an independent chairman at a target company. However, we will not support proposals that include overly prescriptive definitions
of “independent.”
P
ROXY
A
CCESS
Shareholders have consistently sought mechanisms through which they could secure a meaningful voice in director elections in recent years.
While many of these efforts have centered on regulatory changes at the SEC, the United States Congress and the Obama Administration have placed “Proxy Access” in the spotlight of the U.S. Government’s most recent corporate
governance-related financial reforms. Regulations allowing or mandating the reimbursement of solicitation expenses for successful board candidates exist and further regulation is pending. A 2009 amendment to the Delaware Corporate Code allows
companies to adopt bylaw provisions providing shareholders proxy access.
Further, in July 2010, President Obama signed into law
the Dodd-Frank Wall Street Reform and Consumer Protection Act, (the “Dodd-Frank Act”). This Act provides the SEC with the authority to adopt rules permitting shareholders to use issuer proxy solicitation materials to nominate director
candidates. The SEC received over 500 comments regarding proposed proxy access, some of which questioned the agency’s authority to adopt such a rule. Nonetheless, in August 2010, the SEC adopted final Rule 14a-11, which under certain
circumstances, gives shareholders (and shareholder groups) who have collectively held at least 3% of the voting power of a company’s securities continuously for at least three years, the right to nominate up to 25% of a board’s directors
and have such nominees included on a company’s ballot and described in its proxy statement. While final Rule 14a-11 was originally scheduled to take effect on November 15, 2010, on October 4, 2010, the SEC announced that it would
delay the rule’s implementation following the filing of a lawsuit by the U.S. Chamber Of Commerce and the Business Roundtable. In July 2011, the United States Court of Appeals for the District of Columbia ruled against the SEC based on what it
perceived to be the SEC’s failure to fully consider the costs and the benefits of the proxy access rules. On September 6, 2011, the SEC announced that it would not be seeking rehearing
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of the decision. However, while rule 14a-11 was vacated, the U.S. Court of Appeals issued a stay on the “private ordering” amendments to Rule 14a-8, meaning that companies are no longer
able to exclude shareholder proposals requesting that they adopt procedures to allow for shareholder nominees to be included in proxy statements (“Statement by SEC Chairman Mary L. Schapiro on Proxy Access Ligation.” SEC Press Release.
September 6, 2011).
Glass Lewis will consider supporting well-crafted and reasonable proposals requesting proxy access, as
we believe that in some cases, adoption of this provision allows for improved shareholder rights and ensures that shareholders who maintain a long-term interest in the target company have an ability to nominate candidates for the board. Glass Lewis
reviews proposals requesting proxy access on a case-by-case basis, and will consider the following in our analysis:
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The shareholder proponent and their reasoning for putting forth the proposal at the target company;
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The percentage ownership requested and holding period requirement;
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Shareholder base in both percentage of ownership and type of shareholder (e.g., hedge fund, activist investor, mutual fund, pension fund, etc.);
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Responsiveness of board and management to shareholders evidenced by progressive shareholder rights policies (e.g., majority voting, declassifying boards,
etc.) and reaction to shareholder proposals;
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Company performance and steps taken to improve bad performance (e.g., new executives/ directors, spin-offs, etc.);
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Existence of anti-takeover protections or other entrenchment devices; and
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Opportunities for shareholder action (e.g., ability to act by written consent or right to call a special meeting).
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ENVIRONMENT
There are significant financial, legal and reputational risks to companies resulting from poor environmental practices or negligent oversight thereof. We believe part of the board’s role is to ensure
that management conducts a complete risk analysis of company operations, including those that have environmental implications. Directors should monitor management’s performance in mitigating environmental risks attendant with operations in
order to eliminate or minimize the risks to the company and shareholders.
When management and the board have displayed disregard
for environmental risks, have engaged in egregious or illegal conduct, or have failed to adequately respond to current or imminent environmental risks that threaten shareholder value, we believe shareholders should hold directors accountable. When a
substantial environmental risk has been ignored or inadequately addressed, we may recommend voting against responsible members of the governance committee, or members of a committee specifically charged with sustainability oversight.
With respect to environmental risk, Glass Lewis believes companies should actively consider their exposure to:
Direct environmental risk: Companies should evaluate financial exposure to direct environmental risks associated with their operations.
Examples of direct environmental risks are those associated with spills, contamination, hazardous leakages, explosions, or reduced water or air quality, among others. Further, firms should consider their exposure to environmental risks emanating
from systemic change over which they may have only limited control, such as insurance companies affected by increased storm severity and frequency resulting from climate change.
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Risk due to legislation/regulation: Companies should evaluate their exposure to shifts or
potential shifts in environmental regulation that affect current and planned operations. Regulation should be carefully monitored in all jurisdictions within which the company operates. We look closely at relevant and proposed legislation and
evaluate whether the company has responded appropriately.
Legal and reputational risk: Failure to take action on important
issues may carry the risk of damaging negative publicity and potentially costly litigation. While the effect of high-profile campaigns on shareholder value may not be directly measurable, in general we believe it is prudent for firms to evaluate
social and environmental risk as a necessary part in assessing overall portfolio risk.
If there is a clear showing that a
company has inadequately addressed these risks, Glass Lewis may consider supporting appropriately crafted shareholder proposals requesting increased disclosure, board attention or, in limited circumstances, specific actions. In general, however, we
believe that boards and management are in the best position to address these important issues, and will only rarely recommend that shareholders supplant their judgment regarding operations.
C
LIMATE
C
HANGE
AND
G
REEN
H
OUSE
G
AS
E
MISSION
D
ISCLOSURE
Glass Lewis will consider recommending a vote in favor of a reasonably crafted proposal to disclose a
company’s climate change and/or greenhouse gas emission strategies when (i) a company has suffered financial impact from reputational damage, lawsuits and/or government investigations, (ii) there is a strong link between climate
change and its resultant regulation and shareholder value at the firm, and/ or (iii) the company has inadequately disclosed how it has addressed climate change risks. Further, we will typically recommend supporting proposals seeking disclosure
of greenhouse gas emissions at companies operating in carbon- or energy- intensive industries, such basic materials, integrated oil and gas, iron and steel, transportation, utilities, and construction. We are not inclined, however, to support
proposals seeking emissions reductions, or proposals seeking the implementation of prescriptive policies relating to climate change.
S
USTAINABILITY
AND
OTHER
E
NVIRONMENTALLY
-R
ELATED
R
EPORTS
When evaluating requests that a firm produce an environmentally-related report, such as a sustainability report or a report on coal
combustion waste or hydraulic fracturing, we will consider, among other things:
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The financial risk to the company from the firm’s environmental practices and/or regulation;
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The relevant company’s current level of disclosure;
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The level of sustainability information disclosed by the firm’s peers;
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The industry in which the firm operates;
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The level and type of sustainability concerns/controversies at the relevant firm, if any;
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The time frame within which the relevant report is to be produced; and
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The level of flexibility granted to the board in the implementation of the proposal.
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In general, we believe that firms operating in extractive industries should produce reports regarding the risks presented by their
environmental activities, and will consider recommending a vote for reasonably crafted proposals requesting that such a report be produced; however, as with all shareholder proposals, we will evaluate these report requests on a case by case basis.
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O
IL
S
ANDS
The procedure required to extract usable crude from oil sands emits significantly more greenhouse gases than do conventional extraction
methods. In addition, development of the oil sands has a deleterious effect on the local environment, such as Canada’s boreal forests which sequester significant levels of carbon. We believe firms should strongly consider and evaluate exposure
to financial, legal and reputational risks associated with investment in oil sands.
We believe firms should adequately disclose
their involvement in the oil sands, including a discussion of exposure to sensitive political and environmental areas. Firms should broadly outline the scope of oil sands operations, describe the commercial methods for producing oil, and discuss the
management of greenhouse gas emissions. However, we believe that detailed disclosure of investment assumptions could unintentionally reveal sensitive information regarding operations and business strategy, which would not serve shareholders’
interest. We will review all proposals seeking increased disclosure of oil sands operations in the above context, but will typically not support proposals seeking cessation or curtailment of operations.
S
USTAINABLE
F
ORESTRY
Sustainable forestry provides for the long-term sustainable management and use of trees and other non-timber forest products. Retaining the
economic viability of forests is one of the tenets of sustainable forestry, along with encouraging more responsible corporate use of forests. Sustainable land use and the effective management of land are viewed by some shareholders as important in
light of the impact of climate change. Forestry certification has emerged as a way that corporations can address prudent forest management. There are currently several primary certification schemes such as the Sustainable Forestry Initiative
(“SFI”) and the Forest Stewardship Council (“FSC”).
There are nine main principles that comprise the SFI:
(i) sustainable forestry; (ii) responsible practices; (iii) reforestation and productive capacity; (iv) forest health and productivity; (v) long-term forest and soil productivity; (vi) protection of water resources;
(vii) protection of special sites and biodiversity; (viii) legal compliance; and (ix) continual improvement.
The
FSC adheres to ten basic principles: (i) compliance with laws and FSC principles; (ii) tenure and use rights and responsibilities; (iii) indigenous peoples’ rights; (iv) community relations and workers’ rights;
(v) benefits from the forest; (vi) environmental impact; (vii) management plan; (viii) monitoring and assessment; (ix) maintenance of high conservation value forests; and (x) plantations.
Shareholder proposals regarding sustainable forestry have typically requested that the firm comply with the above SFI or FSC principles as
well as to assess the feasibility of phasing out the use of uncertified fiber and increasing the use of certified fiber. We will evaluate target firms’ current mix of certified and uncertified paper and the firms’ general approach to
sustainable forestry practices, both absolutely and relative to its peers but will only support proposals of this nature when we believe that the proponent has clearly demonstrated that the implementation of this proposal is clearly linked to an
increase in shareholder value.
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SOCIAL ISSUES
N
ON
-D
ISCRIMINATION
P
OLICIES
Companies with records of poor labor relations may face lawsuits, efficiency-draining turnover, poor employee performance, and/or
distracting, costly investigations. Moreover, as an increasing number of companies adopt inclusive EEO policies, companies without comprehensive policies may face damaging recruitment, reputational and legal risks. We believe that a pattern of
making financial settlements as a result of lawsuits based on discrimination could indicate investor exposure to ongoing financial risk. Where there is clear evidence of employment practices resulting in negative economic exposure, Glass Lewis may
support shareholder proposals addressing such risks.
M
AC
B
RIDE
P
RINCIPLES
To promote peace, justice and equality regarding employment in Northern Ireland, Dr. Sean
MacBride, founder of Amnesty International and Nobel Peace laureate, proposed the following equal opportunity employment principles:
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Increasing the representation of individuals from underrepresented religious groups in the workforce including managerial, supervisory, administrative,
clerical and technical jobs;
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Adequate security for the protection of minority employees both at the workplace and while traveling to and from work;
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The banning of provocative religious or political emblems from the workplace;
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All job openings should be publicly advertised and special recruitment efforts should be made to attract applicants from underrepresented religious
groups;
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Layoff, recall, and termination procedures should not, in practice, favor particular religious groupings;
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The abolition of job reservations, apprenticeship restrictions, and differential employment criteria, which discriminate on the basis of religion or
ethnic origin;
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The development of training programs that will prepare substantial numbers of current minority employees for skilled jobs, including the expansion of
existing programs and the creation of new programs to train, upgrade, and improve the skills of minority employees;
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The establishment of procedures to assess, identify and actively recruit minority employees with potential for further advancement; and
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The appointment of senior management staff member to oversee the company’s affirmative action efforts and setting up of timetables to carry out
affirmative action principles.
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Proposals requesting the implementation of the above principles are typically proposed at firms that operate, or maintain subsidiaries that operate, in
Northern Ireland. In each case, we will examine the company’s current equal employment opportunity policy and the extent to which the company has been subject to protests, fines, or litigation regarding discrimination in the workplace, if any.
Further, we will examine any evidence of the firm’s specific record of labor concerns in Northern Ireland.
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H
UMAN
R
IGHTS
Glass Lewis believes explicit policies set out by companies’ boards of directors on human rights provides shareholders with the means
to evaluate whether the company has taken steps to mitigate risks from its human rights practices. As such, we believe that it is prudent for firms to actively evaluate risks to shareholder value stemming from global activities and human rights
practices along entire supply chains. Findings and investigations of human rights abuses can inflict, at a minimum, reputational damage on targeted companies and have the potential to dramatically reduce shareholder value. This is particularly true
for companies operating in emerging market countries in extractive industries and in politically unstable regions. As such, while we typically rely on the expertise of the board on these important policy issues, we recognize that, in some instances,
shareholders could benefit from increased reporting or further codification of human rights policies.
M
ILITARY
AND
US G
OVERNMENT
B
USINESS
P
OLICIES
Glass Lewis believes that disclosure to shareholders of information on key company endeavors is
important. However, we generally do not support resolutions that call for shareholder approval of policy statements for or against government programs, most of which are subject to thorough review by the federal government and elected officials at
the national level. We also do not support proposals favoring disclosure of information where similar disclosure is already mandated by law, unless circumstances exist that warrant the additional disclosure.
F
OREIGN
G
OVERNMENT
B
USINESS
P
OLICIES
Where a corporation operates in a foreign country, Glass Lewis believes that the company and board should maintain sufficient controls to
prevent illegal or egregious conduct with the potential to decrease shareholder value, examples of which include bribery, money laundering, severe environmental violations or proven human rights violations. We believe that shareholders should hold
board members, and in particular members of the audit committee and CEO, accountable for these issues when they face reelection, as these concerns may subject the company to financial risk. In some instances, we will support appropriately crafted
shareholder proposals specifically addressing concerns with the target firm’s actions outside its home jurisdiction.
H
EALTH
C
ARE
R
EFORM
P
RINCIPLES
Health care reform in the United
States has long been a contentious political issue and Glass Lewis therefore believes firms must evaluate and mitigate the level of risk to which they may be exposed regarding potential changes in health care legislation. Over the last several
years, Glass Lewis has reviewed multiple shareholder proposals requesting that boards adopt principles for comprehensive health reform, such as the following based upon principles reported by the Institute of Medicine:
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Health care coverage should be universal;
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Health care coverage should be continuous;
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Health care coverage should be affordable to individuals and families;
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The health insurance strategy should be affordable and sustainable for society; and
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Health insurance should enhance health and well-being by promoting access to high-quality care that is effective, efficient, safe, timely,
patient-centered and equitable.
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In general, Glass Lewis believes that individual corporate board rooms are not
the appropriate forum in which to address evolving and contentious national policy issues. The adoption of a narrow set of principles could limit the board’s ability to comply with new regulation or to appropriately and flexibly respond to
health care issues as they arise. As such, barring a compelling reason to the contrary, we typically do not support the implementation of national health care reform principles at the company level.
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T
OBACCO
Glass Lewis recognizes the contentious nature of the production, procurement, marketing and selling of tobacco products. We also recognize
that tobacco companies are particularly susceptible to reputational and regulatory risk due to the nature of its operations. As such, we will consider supporting uniquely tailored and appropriately crafted shareholder proposals requesting increased
information or the implementation of suitably broad policies at target firms on a case-by-case basis. However, we typically do not support proposals requesting that firms shift away from, or significantly alter, the legal production or marketing of
core products.
R
EPORTING
C
ONTRIBUTIONS
AND
P
OLITICAL
S
PENDING
While corporate contributions to national political parties and committees
controlled by federal officeholders are prohibited under federal law, corporations can legally donate to state and local candidates, organizations registered under 26 USC Sec. 527 of the Internal Revenue Code and state-level political committees.
There is, however, no standardized manner in which companies must disclose this information. As such, shareholders often must search through numerous campaign finance reports and detailed tax documents to ascertain even limited information.
Corporations also frequently use trade associations, which are not required to report funds they receive for or spend on political activity, as a means for corporate political action.
Further, in 2010 the Citizens United v. Federal Election Commission decision by the Supreme Court affirmed that corporations are entitled to
the same free speech laws as individuals and that it is legal for a corporation to donate to political causes without monetary limit. While the decision did not remove bans on direct contributions to candidates, companies are now able to contribute
indirectly, and substantially, to candidates through political organizations. Therefore, it appears companies will enjoy greater latitude in their political actions by this recent decision.
When evaluating whether a requested report would benefit shareholders, Glass Lewis seeks answers to the following three key questions:
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Is the Company’s disclosure comprehensive and readily accessible?
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How does the Company’s political expenditure policy and disclosure compare to its peers?
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What is the Company’s current level of oversight?
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Glass Lewis will consider supporting a proposal seeking increased disclosure of corporate political expenditure and contributions if the firm’s current disclosure is insufficient, or if the firm’s
disclosure is significantly lacking compared to its peers. Further, we will typically recommend voting for proposals requesting reports on lobbying or political contributions and expenditures when there is no explicit board oversight or there is
evidence of inadequate board oversight. Given that political donations are strategic decisions intended to increase shareholder value and have the potential to negatively affect the company, we believe the board should either implement processes and
procedures to ensure the proper use of the funds or closely evaluate the process and procedures used by management. We will also consider supporting such proposals when there is verification, or credible allegations, that the company is mismanaging
corporate funds through political donations. If Glass Lewis discovers particularly egregious actions by the company, we will consider recommending voting against the governance committee members or other responsible directors.
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A
NIMAL
W
ELFARE
Glass Lewis believes that it is prudent for management to assess potential exposure to regulatory, legal and reputational risks associated
with all business practices, including those related to animal welfare. A high-profile campaign launched against a company could result in shareholder action, a reduced customer base, protests and potentially costly litigation. However, in general,
we believe that the board and management are in the best position to determine policies relating to the care and use of animals. As such, we will typically vote against proposals seeking to eliminate or limit board discretion regarding animal
welfare unless there is a clear and documented link between the board’s policies and the degradation of shareholder value.
I
NTERNET
C
ENSORSHIP
Legal and ethical questions regarding the use and management of the
Internet and the worldwide web have been present since access was first made available to the public almost twenty years ago. Prominent among these debates are the issues of privacy, censorship, freedom of expression and freedom of access. Glass
Lewis believes that it is prudent for management to assess its potential exposure to risks relating to the internet management and censorship policies. As has been seen at other firms, perceived violation of user privacy or censorship of Internet
access can lead to high-profile campaigns that could potentially result in decreased customer bases or potentially costly litigation. In general, however, we believe that management and boards are best equipped to deal with the evolving nature of
this issue in various jurisdictions of operation.
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RANCISCO
Headquarters
Glass, Lewis & Co., LLC
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Tel: +1 415-678-4110
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Tel: +1 212-797-3777
Fax: +1 212-980-4716
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USTRALIA
CGI Glass Lewis
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Tel: +61 2
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