THE
SELECT SECTOR SPDR®
TRUST (THE “TRUST”)
STATEMENT
OF ADDITIONAL INFORMATION
(as
revised March 4, 2024)
This Statement of
Additional Information (“SAI”) is not a
prospectus. With respect to each of the Trust's series listed below, this SAI
should be read in conjunction with the prospectus dated January 31,
2024 (the “Prospectus”), as may be
revised
from time to time.
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THE
COMMUNICATION SERVICES SELECT SECTOR SPDR®
FUND |
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THE
CONSUMER DISCRETIONARY SELECT SECTOR SPDR®
FUND |
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THE
CONSUMER STAPLES SELECT SECTOR SPDR®
FUND |
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THE
ENERGY SELECT SECTOR SPDR®
FUND |
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THE
FINANCIAL SELECT SECTOR SPDR®
FUND |
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THE
HEALTH CARE SELECT SECTOR SPDR®
FUND |
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THE
INDUSTRIAL SELECT SECTOR SPDR®
FUND |
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THE
MATERIALS SELECT SECTOR SPDR®
FUND |
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THE
REAL ESTATE SELECT SECTOR SPDR®
FUND |
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THE
TECHNOLOGY SELECT SECTOR SPDR®
FUND |
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THE
UTILITIES SELECT SECTOR SPDR®
FUND |
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Principal U.S.
Listing Exchange for each ETF: NYSE Arca, Inc.
Capitalized terms
used herein that are not defined have the same meaning as in the Prospectus,
unless otherwise noted. Copies of the
Prospectus and the Trust's Annual
Report to Shareholders for the fiscal year
ended September 30, 2023 may be obtained
without charge by writing to the Trust's Distributor, ALPS Portfolio Solutions
Distributor, Inc., at 1290 Broadway, Suite
1000, Denver, Colorado 80203, by visiting the Funds' website at
https://www.sectorspdr.com or by calling 1-866-732-8673. The
Report of Independent Registered Public Accounting Firm, financial highlights
and financial statements of the
Funds included in the Trust's Annual Report to Shareholders for the fiscal year
ended September 30, 2023 are
incorporated by reference into this SAI.
“S&P®
”, “S&P
500®”, “Standard &
Poor's Depositary Receipts®” and “SPDR®” are trademarks of
Standard & Poor's Financial Services
LLC, and “Select
Sector®” is a trademark of
S&P Dow Jones Indices LLC. Each of these trademarks have been licensed
for use in connection with the listing and trading of Select Sector SPDRs on
NYSE Arca, Inc. (the “Exchange”), a national
securities exchange. The stocks included in each Select Sector Index (upon which
the Select Sector SPDRs are
based) are selected by S&P Dow Jones Indices LLC (“S&P
DJI” and sometimes
referred to as the “Index Compilation
Agent”) from the universe
of companies represented by the S&P 500 Index (“S&P
500”). The composition and
weighting of the stocks included in each Select Sector Index can be expected to
differ from the composition and
weighting of stocks included in any similar S&P 500 sector index that is
published and disseminated by S&P DJI
(sometimes referred to as the “Index
Provider”) because, unlike
the Select Sector Indices, the S&P 500 sector indices do not limit
the weight of any stocks in the indices.
The information contained herein regarding the Select Sector
Indices, securities markets and The Depository Trust Company
(“DTC”) was obtained from
publicly available sources.
DISCLAIMERS
Each Select Sector
Index is based on equity securities of public companies that are components of
the S&P 500, selected and included in the
particular Select Sector Indices on the basis of its GICS (Global Industry
Classification Standard) classification, with
certain exceptions described below, by the Index Compilation Agent. S&P DJI
also acts as “Index Calculation
Agent” in connection with
the calculation and dissemination of each Select Sector Index.
Select Sector SPDRs
are not sponsored, endorsed, sold or marketed by S&P DJI or any of its
affiliates. S&P DJI and its affiliates make no
representation or warranty, express or implied, to the owners of the Select
Sector SPDRs or any member of the public
regarding the advisability of investing in securities generally or in the Select
Sector SPDRs particularly or the
ability of a Select Sector SPDR Fund to track the performance of the various
sectors represented in the stock market. The
stocks included in each Select Sector Index were selected by the Index
Compilation Agent from a universe of
companies represented by the S&P 500. Select Sector Indices use a
“modified market
capitalization”
weighting which
limits the weight of each Component Stock in the index. As such, the weightings
of each Select Sector index can be
expected to differ from the weightings of stocks included in the corresponding
S&P 500 sector index that is published and
disseminated by S&P DJI, as the S&P 500 sector indices use a float
adjusted market capitalization which does not limit the
weight of any stocks in the index.
With respect to the
Select Sector Indices, S&P DJI's only relationship to the Trust is the
licensing of certain trademarks and trade names of
S&P, the S&P 500 Index and Select Sector Indices which are determined,
composed and calculated by S&P DJI.
S&P® and S&P
500® are trademarks of
Standard & Poor's Financial Services LLC, an affiliate of S&P DJI;
Select
Sector® is a trademark of
S&P DJI; and Dow Jones® is a trademark of
Dow Jones Trademark Holdings LLC. Each of these trademarks
have been licensed for use by S&P DJI and sublicensed for certain purposes
by the Trust. S&P DJI and its affiliates
have no obligation to take the needs of SSGA FM, the Trust or the owners of Fund
Shares into consideration in
determining, composing or calculating the S&P 500 or the Select Sector
Indices. S&P DJI and its affiliates are not responsible
for and have not participated in any determination or calculation made with
respect to issuance or redemption of the
Select Sector SPDRs. S&P DJI and its affiliates have no obligation or
liability in connection with the administration,
marketing or trading of the Select Sector SPDRs.
Although S&P DJI
seeks to obtain and use information from sources which it considers reliable,
S&P DJI and its affiliates do not guarantee the
accuracy and/or completeness of the S&P 500, the Select Sector Indices or
any data related thereto. S&P DJI and its
affiliates make no warranty, express or implied, as to results to be obtained by
the Trust, owners of the Select Sector SPDRs,
or any other person or entity from the use of the S&P 500, the Select Sector
Indices or any data related thereto in
connection with the rights licensed under the license agreement or for any other
use. S&P DJI and its affiliates make no
express or implied warranties, and hereby expressly disclaim all warranties of
merchantability or fitness for a particular
purpose, with respect to the S&P 500, the Select Sector Indices or any data
related thereto. Without limiting any of the
foregoing, in no event shall S&P DJI and its affiliates have any liability
for any special, punitive, indirect or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
The shares are not
sponsored or marketed by S&P DJI or its respective
affiliates.
General
Description of the Trust
The Trust is an
open-end management investment company registered with the U.S. Securities and
Exchange Commission (the
“SEC”) under the
Investment Company Act of 1940, as amended (the “1940 Act”), and the offering
of each
Fund's shares (“Shares” or “Fund
Shares”) is registered with
the SEC under the Securities Act of 1933, as amended (the “Securities
Act”). The Trust
currently consists of 11 series (each, a “Select Sector SPDR
Fund” or “Fund” and collectively, the
“Select Sector SPDR
Funds” or “Funds”) as identified on
the front cover and described below.
The Trust was
organized as a Massachusetts business trust on June 10, 1998. The Trust is
governed by a Board of Trustees (the
“Board”). The Select Sector
SPDR Funds offered by the Trust are: The Communication Services Select
Sector
SPDR Fund; The Consumer Discretionary Select Sector SPDR Fund; The Consumer
Staples Select Sector SPDR Fund; The Energy
Select Sector SPDR Fund; The Financial Select Sector SPDR Fund; The Health Care
Select Sector SPDR Fund; The
Industrial Select Sector SPDR Fund; The Materials Select Sector SPDR Fund; The
Real Estate Select Sector SPDR Fund;
The Technology Select Sector SPDR Fund; and The Utilities Select Sector SPDR
Fund. The investment objective
of each Select Sector SPDR Fund is to provide investment results that, before
expenses, correspond generally to the
price and yield performance of publicly traded equity securities of companies in
a particular sector or group of industries,
as represented by a corresponding benchmark index referred to herein as a
“Select Sector
Index.”
SSGA
Funds Management, Inc. (“SSGA FM” or the “Adviser”) manages each
Select Sector SPDR Fund.
Each Select Sector
SPDR Fund offers and issues Shares at their net asset value (sometimes referred
to herein as “NAV”) only in aggregations
of a specified number of Shares (each, a “Creation
Unit”). Each Select
Sector SPDR Fund offers and issues Creation
Units generally in exchange for a basket of equity securities designated by the
Fund (“Deposit
Securities”) together with the
deposit of a specified cash payment (“Cash
Component”). The Shares are
listed on the Exchange and trade at market
prices. These prices may differ from the Shares' net asset values. The Shares
are also redeemable only in Creation Unit
aggregations (except upon termination of a Select Sector SPDR Fund), and
generally in exchange for portfolio securities
and a specified cash payment (“Cash Redemption
Amount”).
The Trust reserves
the right to offer a “cash” option for
purchases and redemptions of Creation Units (subject to applicable legal requirements)
although it has no current intention of doing so. Creation Units may be issued
in advance of receipt of all Deposit
Securities subject to various conditions including a requirement to maintain on
deposit with the Trust cash in an amount at least
equal to a specified percentage of the market value of the missing Deposit
Securities as set forth in the Participant
Agreement (as defined below). See “Purchase and
Redemption of Creation Units.” The Trust may
impose a transaction fee for
each creation or redemption. In all cases, such fees will be limited in
accordance with the requirements of the SEC
applicable to management investment companies offering redeemable
securities.
THE
SELECT SECTOR INDICES AND RELEVANT EQUITY MARKETS
Each Select Sector
Index is the benchmark for its respective Select Sector SPDR Fund and is
intended to give investors an efficient,
modified market capitalization-based way to track the movement of baskets of
equity securities of public companies that are
components of the S&P 500 and are included in a particular sector or group
of industries.
CONSTRUCTION
AND MAINTENANCE STANDARDS FOR THE SELECT SECTOR INDICES
Each Select Sector
Index was developed and is maintained in accordance with the following
criteria:
Each of the
component stocks in a Select Sector Index (the “Component
Stocks”) has been selected
from the universe of companies defined by
the S&P 500.
The Select Sector
Indices include all of the companies represented in the S&P 500.
The Index
Compilation Agent assigns each constituent stock of the S&P 500 Index to a
Select Sector Index based on GICS. S&P DJI
has sole control over the removal of stocks from the S&P 500 and the
selection of replacement stocks to be added to the
S&P 500.
Each Select Sector
Index is weighted, on a quarterly basis, based on the float-adjusted market
capitalization of each of the Component
Stocks, subject to the following asset diversification requirements: (i) the
market capitalization-based weighted value of
any single Component Stock measured with prices as of the reference date and
membership, shares outstanding and
investable weight factors as of the rebalancing effective date may not exceed
25% of the total value of its respective Select
Sector Index; and (ii) the sum of the constituent stocks with weight greater
than 4.8% cannot exceed 50% of the total
Index weight.
Rebalancing the
Select Sector Indices to meet the asset diversification requirements will be the
responsibility of S&P. If on the second Friday of
any calendar quarter-end month (a “Quarterly
Qualification Date”), a Component Stock
(or two or more Component
Stocks) approaches the maximum allowable value limits set forth above (the
“Asset
Diversification Limits”), the percentage
that such Component Stock (or Component Stocks) represents in the Select Sector
Index will be reduced and the
market capitalization-based weighted value of such Component Stock (or Component
Stocks) will be redistributed across
the Component Stocks that do not closely approach the Asset Diversification
Limits in accordance with the following
methodology: First, each Component Stock that exceeds 24% of the total value of
the Select Sector Index will be
reduced to 23% of the total value of the Select Sector Index and the excess
amount will be redistributed proportionally
across the remaining Component Stocks that each represent less than 23% of the
total value of the Select Sector Index. If as
a result of this redistribution, another Component Stock then exceeds 23%, the
redistribution will be repeated as
necessary until no company breaches the 23% weight cap. Second, if the sum of
Component Stocks that each exceed 4.8% of
the total value of the Select Sector Index exceeds 50% of the total value of the
Index, the Component Stocks
will be ranked in descending order of their float-adjusted market
capitalization, and the first Component Stock to
cause the 50% limit to be breached will be reduced to 4.5% and the excess amount
will be distributed proportionally
across all remaining Component Stocks that represent less than 4.5% of the total
value of the Select Sector Index. This
redistribution process will be repeated as necessary until at least 50% of the
value of the Select Sector Index is accounted for by
Component Stocks representing no more than 4.8% of the total value of the Select
Sector Index. If necessary, this
reallocation process may take place more than once to ensure that the Select
Sector Index and the Select Sector SPDR Fund
portfolio based upon it conform to the requirements for qualification of the
Select Sector SPDR Fund as a regulated
investment company (“RIC”), under the
Internal Revenue Code of 1986, as amended (the “Internal
Revenue
Code”).
The rebalancing of
the Select Sector Indices, based on the processes described above, occurs at the
closing prices of the second Friday of
March, June, September and December. Changes will become effective after the
market close on the third Friday of
March, June, September and December.
Additionally, if, on
the second to last business day of March, June, September, or December a company
has a weight greater than 24% or
the sum of the companies with weights greater than 4.8% exceeds 50%, a secondary
rebalancing will be triggered with
the rebalancing effective date being after the close of the last business day of
the month. This secondary
rebalancing will use the closing prices as of the second to last business day of
March, June, September, or December, and
membership, shares outstanding, and investable weight factors as of the
rebalancing effective date.
Periodically, the
Index Compilation Agent will supply S&P with sector designations for a
number of stocks deemed likely candidates for
replacement selection by the S&P Dow Jones Indices' 500 Index Committee. If
a replacement not on the current list is
selected by the S&P Dow Jones Indices' 500 Index Committee, S&P will ask
the Index Compilation Agent to assign the stock to
one or more of the 11 sectors promptly. S&P will disseminate information on
this assignment and on consequent changes
in the Select Sector Index(es).
The Index
Compilation Agent at any time may determine that a Component Stock which has
been assigned to a Select Sector Index has
undergone such a transformation in the composition of its business that it
should be removed from that Select Sector Index
and assigned to a different Select Sector Index, or that it should remain in the
Select Sector Index and be assigned to an
additional Select Sector Index. In the event that the Index Compilation Agent
notifies S&P that a Component Stock's
Select Sector Index assignment should be changed, S&P will disseminate
notice of the change following its
standard procedure for announcing index changes and will implement the change in
the affected Select Sector Indices on a
date no less than one week after the initial dissemination of information on the
sector change to the maximum extent
practicable. It is not anticipated that Component Stocks will change sectors
frequently.
Component Stocks
removed from and added to the S&P 500 will be deleted from and added to the
appropriate Select Sector Index(es) on
the same schedule used by S&P DJI for additions and deletions from the
S&P 500 insofar as practicable.
A Component Stock
may move from one Select Sector Index to another when a GICS reclassification is
made. A Component Stock is
deleted from the relevant Select Sector Index and added to the other at the time
this reclassification occurs for the
S&P 500.
Select
Sector Index Calculations
With the exception
of the weighting constraints described above, each Select Sector Index is
calculated using the same methodology utilized
by S&P DJI in calculating the S&P 500. In particular:
Each Select Sector
Index is calculated using a base-weighted aggregate methodology; that means the
level of the Select Sector Index
reflects the total market value of all of its Component Stocks relative to a
particular base period. Statisticians refer to this type
of index, one with a set of combined variables (such as price and number of
shares), as a composite index.
The total market
value of a company is determined by multiplying the price of the stock by the
number of common shares outstanding. An
indexed number is used to represent the results of the aggregate market value
calculation in order to make the value
easier to work with and track over time.
The daily
calculation of each Select Sector Index is computed by dividing the total market
value of the companies in the Select Sector Index
by a number called the “Index
Divisor.” By itself, the
Index Divisor is an arbitrary number. However, in the context of the
calculation of the Select Sector Index, it is the only link to the original base
period value of the Select Sector Index. The
Index Divisor keeps the Select Sector Index comparable over time and adjustments
to the Index Divisor ensure that there
are no changes in the Select Sector Index level as a result of non-market forces
(corporate actions, replacements of
stocks in a Select Sector Index, weighting changes, etc.).
Four times a year on
a Friday close to the end of each calendar quarter, the share totals of the
companies in the S&P 500 are updated by
S&P DJI. This information is utilized to update the share totals of
companies in each Select Sector Index. After the totals are
updated, the Index Divisor is adjusted to compensate for the net change in the
market value of the Select Sector
Index.
Certain mandatory
actions, such as merger and acquisition driven share/investable weight factor
changes, stock splits, and mandatory
distributions, are not subject to a minimum threshold for implementation.
Material share/investable weight factor changes of at
least 5% and $150 million resulting from certain non-mandatory actions follow
the accelerated implementation rule
with sufficient advance notification, and share/investable weight factor changes
deemed non-material are implemented
quarterly. Changes are reviewed by S&P DJI and, when appropriate, an
immediate adjustment is made to the number of
shares outstanding used to calculate the Select Sector Index. Any adjustment
made by S&P DJI in shares outstanding
will result in a corresponding adjustment to each affected Select Sector
Index.
S&P DJI handles
corporate actions which may arise from time to time and which may have an impact
on the calculation of the S&P 500 and,
consequently, on the calculation of the Select Sector Index. Corporate actions
such as a merger or acquisition, stock
splits, spin-offs, etc., require adjustments in the Select Sector Index
calculation. Index Divisor adjustments,
calculated when necessary, are handled by S&P DJI in its maintenance of the
S&P 500. In the event a merger or
acquisition changes the relative importance of a company's participation in two
or more sectors in a major way, the Select Sector
Index assignment of the stock may change. In any event, a new Index Divisor for
affected Select Sector Indices will be
disseminated promptly by S&P DJI.
Select
Sector Index Dissemination
Similar to other
published stock index values, the value of each Select Sector Index will be
calculated continuously and disseminated at
least every 5 seconds via the Consolidated Tape Association. The major
electronic financial data vendors – Bloomberg and
Reuters—are expected to publish information on each Select Sector Index for
their subscribers.
Brief descriptions
of the Select Sector Indices on which the Select Sector SPDR Funds are based and
the equity markets in which the Select
Sector SPDR Funds are invested are provided below. A list of the Component
Stocks included in each Select Sector SPDR
Fund as of September 30, 2023 is included in the Trust's Annual Report to
Shareholders for the fiscal year ended September
30, 2023.
There is no
assurance that any Select Sector SPDR Fund holds any particular security, is
invested in any particular industry or is
invested in a particular security/industry in any certain percentage. Holdings
in the Select Sector SPDR Funds will
change.
Select
Sector Index Descriptions
THE
COMMUNICATION SERVICES SELECT SECTOR INDEX
The Communication
Services Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the
movements of certain public companies that are components of the S&P 500 and
are involved in the development and
production of communication services products.
THE
CONSUMER DISCRETIONARY SELECT SECTOR INDEX
The Consumer
Discretionary Select Sector Index is intended to give investors an efficient,
modified market capitalization-based way to track the
movements of certain public companies that are components of the S&P 500 and
are involved in the development and
production of consumer discretionary products.
THE
CONSUMER STAPLES SELECT SECTOR INDEX
The Consumer Staples
Select Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the
movements of certain public companies that are components of the S&P 500 and
are involved in the development and
production of consumer staples products.
THE
ENERGY SELECT SECTOR INDEX
The Energy Select
Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
involved in the development and
production of energy products.
THE
FINANCIAL SELECT SECTOR INDEX
The Financial Select
Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
involved in the development and
production of financial products.
THE
HEALTH CARE SELECT SECTOR INDEX
The Health Care
Select Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
health care related firms.
THE
INDUSTRIAL SELECT SECTOR INDEX
The Industrial
Select Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
industrials.
THE
MATERIALS SELECT SECTOR INDEX
The Materials Select
Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are in
basic materials industries.
THE
REAL ESTATE SELECT SECTOR INDEX
The Real Estate
Select Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
involved in the investment in and/or management
and development of real estate.
THE
TECHNOLOGY SELECT SECTOR INDEX
The Technology
Select Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are
involved in the development and
production of technology products.
THE
UTILITIES SELECT SECTOR INDEX
The Utilities Select
Sector Index is intended to give investors an efficient, modified market
capitalization-based way to track the movements
of certain public companies that are components of the S&P 500 and are in
the utilities industry.
Each Select Sector
SPDR Fund is classified as a non-diversified investment company under the 1940
Act. A “non-diversified” classification
means that a Fund is not limited by the 1940 Act with regard to the percentage
of its assets that may be invested in
the securities of a single issuer. This means that a Select Sector SPDR Fund may
invest a greater portion of its
assets in the securities of a single issuer than a diversified fund. The
securities of a particular issuer may constitute a greater
portion of an Index of each Select Sector SPDR Fund and, therefore, the
securities may constitute a greater portion of a
Select Sector SPDR Fund's portfolio. This may have an adverse effect on a Fund's
performance or subject a Select
Sector SPDR Fund's Shares to greater price volatility than more diversified
investment companies.
Although each Select
Sector SPDR Fund is non-diversified for purposes of the 1940 Act, each Select
Sector SPDR Fund intends to maintain
the required level of diversification and otherwise conduct its operations so as
to qualify as a RIC for purposes of the
Internal Revenue Code, and to relieve the Select Sector SPDR Fund of any
liability for federal income tax to the extent that
its earnings are distributed to shareholders. Compliance with the
diversification requirements of the Internal Revenue
Code may severely limit the investment flexibility of a Select Sector SPDR Fund
and may make it less likely that the
Select Sector SPDR Fund will meet its investment objective.
LENDING
PORTFOLIO SECURITIES
Each Select Sector
SPDR Fund may lend portfolio securities to certain creditworthy borrowers in
U.S. and non-U.S. markets in an amount
not to exceed forty percent (40%) of the value of its net assets. The borrowers
provide collateral that is marked to
market daily in an amount at least equal to the current market value of the
securities loaned. A Select Sector SPDR Fund may
terminate a loan at any time and obtain the securities loaned. A Select Sector
SPDR Fund receives the value
of any interest or cash or non-cash distributions paid on the loaned securities.
A Select Sector SPDR Fund cannot vote
proxies for securities on loan, but may recall loans to vote proxies if a
material issue affecting a Select Sector SPDR Fund's
economic interest in the investment is to be voted upon. Distributions received
on loaned securities in lieu of dividend
payments (i.e., substitute payments) would not be considered qualified dividend
income.
With respect to
loans that are collateralized by cash, the borrower may be entitled to receive a
fee based on the amount of cash collateral. A
Select Sector SPDR Fund is compensated by the difference between the amount
earned on the reinvestment of cash
collateral and the fee paid to the borrower. In the case of collateral other
than cash, a Select Sector SPDR Fund is
compensated by a fee paid by the borrower equal to a percentage of the market
value of the loaned securities. Any cash
collateral may be reinvested in certain short-term instruments and highly liquid
instruments either directly on behalf
of each lending Select Sector SPDR Fund or through one or more joint accounts or
money market funds, which may
include those managed by the Adviser.
A Select Sector SPDR
Fund may pay a portion of the interest or fees earned from securities lending to
a borrower as described above, and
to one or more securities lending agents approved by the Board who administer
the lending program for the Select
Sector SPDR Funds in accordance with guidelines approved by the Board. In such
capacity, the lending agent causes the
delivery of loaned securities from a Select Sector SPDR Fund to borrowers,
arranges for the return of loaned securities to
the Select Sector SPDR Fund at the termination of a loan, requests deposit of
collateral, monitors the daily value of the
loaned securities and collateral, requests that borrowers add to the collateral
when required by the loan agreements, and
provides recordkeeping and accounting services necessary for the operation of
the program. State Street Bank and
Trust Company (“State
Street”), an affiliate of
the Trust, has been approved by the Board to serve as a securities lending
agent for each Select Sector SPDR Fund and the Trust has entered into an
agreement with State Street for such services.
Among other matters, the Trust has agreed to indemnify State Street for certain
liabilities. State Street has received an
order of exemption from the SEC under Sections 17(a) and 12(d)(1) under the 1940
Act to serve as the lending agent for
affiliated investment companies such as the Trust and to invest the cash
collateral received from loan transactions to be
invested in an affiliated cash collateral fund.
Securities lending
involves exposure to certain risks, including operational risk (i.e., the risk
of losses resulting from problems in the
settlement and accounting process), “gap” risk (i.e., the
risk of a mismatch between the return on cash collateral
reinvestments and the fees a Select Sector SPDR Fund has agreed to pay a
borrower), risk of loss of collateral, credit, legal,
counterparty and market risk. Although State Street has agreed to provide a
Select Sector SPDR Fund with indemnification in
the event of a borrower default, a Select Sector SPDR Fund is still exposed to
the risk of losses in the event a borrower
does not return a Select Sector SPDR Fund's securities as agreed. For example,
delays in recovery of lent securities may
cause a Select Sector SPDR Fund to lose the opportunity to sell the securities
at a desirable price.
Risks inherent in
investing in equity securities include the risk that the financial condition of
issuers may become impaired or that the general
condition of the stock market may deteriorate (either of which may cause a
decrease in the value of a Fund's portfolio
securities and therefore a decrease in the value of Shares of the Fund). Common
stock is susceptible to general stock market
fluctuation and to volatile increases and decreases in value as market
confidence and perceptions change. These
investor perceptions are based on various and unpredictable factors, including
expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional
political, economic or banking crises.
Holders of common
stock incur more risk than holders of preferred stock and debt obligations
because common stockholders, as
owners of the issuer, have generally inferior rights to receive payments from
the issuer in comparison with the rights of
creditors of, or holders of debt obligations or preferred stock issued by, the
issuer. Further, unlike debt securities which
typically have a stated principal amount payable at maturity (whose value,
however, will be subject to market fluctuations
prior thereto), or preferred stock which typically has a liquidation preference
and which may have stated optional or
mandatory redemption provisions, common stock has neither a fixed principal
amount nor a maturity. Common stock values
are subject to market fluctuations as long as the common stock remains
outstanding.
REAL
ESTATE INVESTMENT TRUSTS (“REITs”)
The Financial Select
Sector SPDR Fund may invest a portion of its assets in mortgage REITS
(“Mortgage
REITs”). The Real Estate Select
Sector SPDR Fund may invest a portion of its assets in REITs, excluding Mortgage
REITs. REITs pool investors' funds for
investment primarily in income producing real estate or real estate loans or
interests. A REIT is not taxed on income
distributed to shareholders if it complies with several requirements relating to
its organization, ownership, assets, and income
and a requirement that it distribute to its shareholders at least 90% of its
taxable income (other than net capital gains)
for each taxable year. REITs can generally be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs,
which invest the majority of their assets directly in real property, derive
their income primarily from rents. Equity REITs
can also realize capital gains by selling properties that have appreciated in
value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income primarily
from interest payments. Hybrid REITs combine
the characteristics of both Equity REITs and Mortgage REITs. The Funds will not
invest in real estate directly, but
only in securities issued by real estate companies. However, the Funds may be
subject to risks similar to those associated
with the direct ownership of real estate (in addition to securities markets
risks) to the extent they invest in the securities of
companies in the real estate industry. These include declines in the value of
real estate, risks related to general and local
economic conditions, dependency on management skill, heavy cash flow dependency,
possible lack of availability of
mortgage funds, overbuilding, extended vacancies of properties, increased
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 neighborhood values, the appeal of properties
to tenants and changes in interest
rates. Investments in REITs may subject Fund shareholders to duplicate
management and administrative
fees.
In addition to these
risks, Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while
Mortgage REITs may be affected by the quality of any credit extended. Further,
Equity and Mortgage REITs are dependent upon
management skills and generally may not be diversified. Equity and Mortgage
REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, Equity and
Mortgage REITs could possibly fail to
qualify for the beneficial tax treatment available to REITs under the Internal
Revenue Code, or to maintain their exemptions
from registration under the 1940 Act. The above factors may also adversely
affect a borrower's or a lessee's ability to
meet its obligations to the REIT. In the event of a default by a borrower or
lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting
investments.
REPURCHASE
AGREEMENTS
Each Select Sector
SPDR Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from
its excess cash balances and to invest securities lending cash collateral. A
repurchase agreement is an agreement
under which a Select Sector SPDR Fund acquires a financial instrument (e.g., a
security issued by the U.S. government or
an agency thereof, a banker's acceptance or a certificate of deposit) from a
seller, subject to resale to the seller at an
agreed upon price and date (normally, the next Business Day—as defined below). A
repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the
period the instrument is held by a Select Sector SPDR Fund and is unrelated to
the interest rate on the underlying
instrument.
In these repurchase
agreement transactions, the securities acquired by a Select Sector SPDR Fund
(including accrued interest earned
thereon) must have a total value in excess of the value of the repurchase
agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of a Select Sector SPDR Fund's net
assets will be invested in illiquid
investments, including repurchase agreements having maturities longer than seven
days and securities subject to legal or
contractual restrictions on resale, or for which there are no readily available
market quotations.
The use of
repurchase agreements involves certain risks. For example, if the other party to
the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, a Select Sector SPDR Fund may incur
a loss upon disposition of the security. If the other party to the agreement
becomes insolvent and subject to
liquidation or reorganization under the U.S. Bankruptcy Code or other laws, a
court may determine that the underlying security
is collateral for a loan by a Select Sector SPDR Fund not within the control of
the Select Sector SPDR Fund and, therefore,
the Select Sector SPDR Fund may not be able to substantiate its interest in the
underlying security and may be deemed an
unsecured creditor of the other party to the agreement.
OTHER
SHORT-TERM INSTRUMENTS
In addition to
repurchase agreements, each Select Sector SPDR Fund may invest in short-term
instruments, including money market
instruments (including money market funds advised by the Adviser), repurchase
agreements, cash and cash equivalents, on
an ongoing basis to provide liquidity or for other reasons. Money market
instruments are generally short-term
investments that may include but are not limited to: (i) shares of money market
funds (including those advised by the Adviser);
(ii) obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities (including government-sponsored
enterprises); (iii) negotiable certificates of deposit (“CDs”), bankers'
acceptances, fixed time deposits and other
obligations of U.S. and foreign banks (including foreign branches) and similar
institutions; (iv) commercial paper
rated at the date of purchase “Prime-1” by Moody's or
“A-1” by S&P, or if
unrated, of comparable quality as determined by the
Adviser; (v) non-convertible corporate debt securities (e.g., bonds and
debentures) with remaining maturities at the
date of purchase of not more than 397 days and that satisfy any rating
requirements set forth in Rule 2a-7 under the 1940 Act;
and (vi) short-term U.S. dollar-denominated obligations of foreign banks
(including U.S. branches) that, in the opinion
of the Adviser, are of comparable quality to obligations of U.S. banks which may
be purchased by a Fund. Any of these
instruments may be purchased on a current or a forward-settled basis. Time
deposits are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates.
Bankers' acceptances are time
drafts drawn on commercial banks by borrowers, usually in connection with
international transactions.
Each Select Sector
SPDR Fund may invest in the securities of other investment companies, including
money market funds (including those
advised by the Adviser or otherwise affiliated with the Adviser), subject to
applicable limitations under Section 12(d)(1)
of the 1940 Act, SEC rules, and the Select Sector SPDR Fund's investment
restrictions.
If a Fund invests in
and, thus, is a shareholder of, another investment company, the Fund's
shareholders will indirectly bear the Fund's
proportionate share of the fees and expenses paid by such other investment
company, including advisory fees, in addition to
both the management fees payable directly by the Fund to the Fund's own
investment adviser and the other expenses that
the Fund bears directly in connection with the Fund's own
operations.
FUTURES
CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Select Sector
SPDR Fund may invest up to 5% of its assets in derivatives, including
exchange-traded futures on indices,
exchange-traded futures on Treasuries or Eurodollars, U.S. exchange-traded or
OTC put and call options contracts and exchange-traded
or OTC swap transactions (including NDFs, interest rate swaps, total return
swaps, excess return swaps, and credit
default swaps).
Futures
and Options on Futures: Futures contracts
generally provide for the future sale by one party and purchase by another party of a
specified commodity or security at a specified future time and at a specified
price. Index futures contracts are
settled daily with a payment by one party to the other of a cash amount based on
the difference between the level of the index
specified in the contract from one day to the next. A futures contract on an
index is an agreement pursuant to which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index
at the close of the last trading day of the contract and the price at which the
index contract originally was written.
Although the value of an index might be a function of the value of certain
specified securities, physical delivery of these
securities is not always made. A public market exists in futures contracts
covering a number of indexes, as well as financial
instruments, including, without limitation: U.S. Treasury bonds; U.S. Treasury
notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the
Australian Dollar; the Canadian Dollar; the British Pound; the Japanese Yen; the
Swiss Franc; the Mexican Peso; and certain
multinational currencies, such as the Euro. It is expected that other futures
contracts will be developed and traded in the
future. Futures contracts are standardized as to maturity date and underlying
instrument and are traded on futures
exchanges.
Each Select Sector
SPDR Fund may purchase and write (sell) call and put options on futures. Options
on futures give the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified
exercise price upon expiration of, or at any time during the period of, the
option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put
option, the opposite is true.
Each Select Sector
SPDR Fund is required to make a good faith margin deposit in cash or U.S.
government securities (or other eligible
collateral) with a broker or custodian to initiate and maintain open positions
in futures contracts. A margin deposit is intended
to assure completion of the contract (delivery or acceptance of the underlying
commodity or payment of the cash
settlement amount) if it is not terminated prior to the specified delivery date.
Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin deposits
which may range upward from less than 5% of the value of the contract being
traded.
After a futures
contract position is opened, the value of the contract is marked to market
daily. If the futures contract price changes to the
extent that the margin on deposit does not satisfy price changes, additional
payments will be required. Conversely, change
in the contract value may reduce the required margin, resulting in a repayment
of excess margin to the contract holder.
Variation margin payments are made to and from the futures broker for as long as
the contract remains open. In such case,
a Select Sector SPDR Fund would expect to earn interest income on its margin
deposits. Although some futures
contracts call for making or taking delivery of the underlying commodity,
generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same exchange, underlying
commodity, security or index and delivery month). If an offsetting purchase
price is less than the original sale price, a Select
Sector SPDR Fund realizes a capital gain, or if it is more, the Select Sector
SPDR Fund realizes a capital loss. Conversely, if
an offsetting sale price is more than the original purchase price, a Select
Sector SPDR Fund realizes a capital gain, or if
it is less, the Select Sector SPDR Fund realizes a capital loss. The transaction
costs also must be included in these
calculations.
Options: Each Select Sector
SPDR Fund may purchase and sell put and call options. Such options may relate to
particular
securities and may or may not be listed on a national securities exchange and
issued by the Options Clearing Corporation. Options
trading is a highly specialized activity that entails greater than ordinary
investment risk. Options on particular
securities may be more volatile than the underlying securities, and therefore,
on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities themselves.
Swap
Transactions: Each Select Sector
SPDR Fund may enter into swap transactions, including interest rate swap, credit
default
swap, NDF, and total return swap transactions. Swap transactions are contracts
between parties in which one party agrees to make
periodic payments to the other party based on the change in market value or
level of a specified rate, index or asset. In
return, the other party agrees to make payments to the first party based on the
return of a different specified rate,
index or asset. Swap transactions will usually be done on a net basis, i.e.,
where the two parties make net
payments with a
Select Sector SPDR Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net
amount of the excess, if any, of a Select Sector SPDR Fund's obligations over
its entitlements with respect to each swap
is accrued on a daily basis and an amount of cash or equivalents having an
aggregate value at least equal to the accrued
excess is maintained by the Select Sector SPDR Fund. Swaps may be used in
conjunction with other instruments to
offset interest rate, currency or other underlying risks. For example, interest
rate swaps may be offset with “caps,”
“floors” or “collars.” A “cap” is essentially a
call option which places a limit on the amount of floating rate interest
that
must be paid on a certain principal amount. A “floor” is essentially a
put option which places a limit on the minimum amount that would be
paid on a certain principal amount. A “collar” is essentially a
combination of a long cap and a short floor where the
limits are set at different levels.
The use of swap
transactions by the Select Sector SPDR Fund entails certain risks, which may be
different from, or possibly greater
than, the risks associated with investing directly in the securities and other
investments that are the referenced asset for
the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses, and
tax planning different from those associated with stocks, bonds, and other
traditional investments. The use of a swap
requires an understanding not only of the referenced asset, reference rate, or
index, but also of the swap itself, without the
benefit of observing the performance of the swap under all the possible market
conditions. Because some swap
transactions have a leverage component, adverse changes in the value or level of
the underlying asset, reference rate, or
index can result in a loss substantially greater than the amount invested in the
swap itself. Certain swaps have the potential
for unlimited loss, regardless of the size of the initial
investment.
Bilateral OTC
transactions differ from exchange-traded or cleared derivatives transactions in
several respects. Bilateral OTC transactions are
transacted directly with dealers and not with a clearing corporation. Without
the availability of a clearing
corporation, bilateral OTC transaction pricing is normally done by reference to
information from market makers and/or available
index data, which information is carefully monitored by the Adviser and verified
in appropriate cases. As bilateral OTC
transactions are entered into directly with a dealer, there is a risk of
nonperformance by the dealer as a result of its
insolvency or otherwise. Under regulations adopted by the CFTC and federal
banking regulators (“Margin Rules”), each Select
Sector SPDR Fund is required to post collateral (known as variation margin) to
cover the mark-to-market exposure in respect
of its uncleared swaps. The Margin Rules also mandate that collateral in the
form of initial margin be posted to
cover potential future exposure attributable to uncleared swap transactions. In
the event a Select Sector SPDR Fund is
required to post collateral in the form of initial margin or variation margin in
respect of its uncleared swap transactions,
all such collateral will be posted with a third party custodian pursuant to a
triparty custody agreement between the Select
Sector SPDR Fund, its dealer counterparty and an unaffiliated
custodian.
The requirement to
execute certain OTC derivatives contracts on exchanges or electronic trading
platforms called swap execution facilities
(“SEFs”) may offer certain
advantages over traditional bilateral OTC trading, such as ease of execution,
price
transparency, increased liquidity and/or favorable pricing. However, SEF trading
may make it more difficult and costly for a Select Sector
SPDR Fund to enter into highly tailored or customized transactions and may
result in additional costs and risks. Market
participants such as the Select Sector SPDR Funds that execute derivatives
contracts through a SEF, whether directly or
through a broker intermediary, are required to submit to the jurisdiction of the
SEF and comply with SEF and CFTC rules
and regulations which impose, among other things disclosure and recordkeeping
obligations. In addition, a Select
Sector SPDR Fund will generally incur SEF or broker intermediary fees when it
trades on a SEF. A Select Sector SPDR
Fund may also be required to indemnify the SEF or broker intermediary for any
losses or costs that may result from the
Select Sector SPDR Fund's transactions on the SEF.
Total
Return Swaps: Each Select Sector
SPDR Fund may enter into total return swap transactions for investment
purposes. Total
return swaps are transactions in which one party agrees to make periodic
payments based on the change in market value of
the underlying assets, which may include a specified security, basket of
securities or security indexes during the specified
period, in return for periodic payments based on a fixed or variable interest
rate of the total return from other
underlying assets. Total return swaps may be used to obtain exposure to a
security or market without owning or taking physical
custody of such security or market, including in cases in which there may be
disadvantages associated with direct
ownership of a particular security. In a typical total return equity swap,
payments made by a Select Sector SPDR Fund or the
counterparty are based on the total return of a particular reference asset or
assets (such as an equity security, a
combination of such securities, or an index). That is, one party agrees to pay
another party the return on a stock, basket of
stocks, or stock index in return for a specified interest rate. By entering into
an equity index swap, for example, the index
receiver can gain exposure to stocks making up the index of securities without
actually purchasing those stocks. Total
return swaps involve not only the risk associated with the investment in the
underlying securities, but also the risk of the
counterparty not fulfilling its obligations under the agreement.
Credit
Default Swaps: Each Select Sector
SPDR Fund may enter into credit default swap transactions for investment
purposes. A credit
default swap transaction may have as reference obligations one or more
securities that are not currently held by a
Select Sector SPDR Fund. A Select Sector SPDR Fund may be either the protection
buyer or protection seller in
the transaction. Credit default swaps may also be structured based on the debt
of a basket of issuers, rather than a single
issuer, and may be customized with respect to the default event that triggers
purchase or other factors. As a protection
seller, a Select Sector SPDR Fund would generally receive an upfront payment or
a fixed rate of income throughout the term
of the swap, which typically is between six months and three years, provided
that there is no credit event. If a credit
event occurs, generally the protection seller must pay the protection buyer the
full face amount of the reference
obligations that may have little or no value. If a Select Sector SPDR Fund were
a protection buyer and no credit event occurred
during the term of the swap, the Select Sector SPDR Fund would recover nothing
if the swap were held through its
termination date. However, if a credit event occurred, the protection buyer may
elect to receive the full notional value of the swap in
exchange for an equal face amount of the reference obligation that may have
little or no value. Where a Select Sector SPDR
Fund is the protection buyer, credit default swaps involve the risk that the
seller may fail to satisfy its payment obligations
to the Select Sector SPDR Fund in the event of a default. The purchase of credit
default swaps involves costs,
which will reduce a Select Sector SPDR Fund's return.
Currency
Swaps:
Each Select Sector SPDR Fund may enter into currency swap transactions for
investment purposes. Currency swaps are
similar to interest rate swaps, except that they involve multiple currencies.
Each Select Sector SPDR Fund may enter into
a currency swap when it has exposure to one currency and desires exposure to a
different currency. Typically, the
interest rates that determine the currency swap payments are fixed, although
occasionally one or both parties may pay a
floating rate of interest. Unlike an interest rate swap, however, the principal
amounts are exchanged at the beginning of the
contract and returned at the end of the contract. In addition to paying and
receiving amounts at the beginning and end of
the transaction, both sides will have to pay in full on a periodic basis based
upon the currency they have borrowed.
Change in foreign exchange rates and changes in interest rates, as described
above, may negatively affect currency
swaps.
Interest
Rate Swaps: Each Select Sector
SPDR Fund may enter into an interest rate swap in an effort to protect against
declines in the
value of fixed income securities held by the Select Sector SPDR Fund. In such an
instance, a Select Sector SPDR Fund may
agree to pay a fixed rate (multiplied by a notional amount) while a counterparty
agrees to pay a floating rate
(multiplied by the same notional amount). If interest rates rise, resulting in a
diminution in the value of a Select Sector SPDR
Fund's portfolio, the Select Sector SPDR Fund would receive payments under the
swap that would offset, in whole or
in part, such diminution in value.
Options
on Swaps: An option on a swap
agreement, or a “swaption,” is a contract that
gives a counterparty the right (but not the obligation)
to enter into a new swap agreement or to shorten, extend, cancel or otherwise
modify an existing swap agreement, at some
designated future time on specified terms. In return, the purchaser pays a
“premium” to the seller of
the
contract. The seller of the contract receives the premium and bears the risk of
unfavorable changes on the underlying swap. Each Select
Sector SPDR Fund may write (sell) and purchase put and call swaptions. Each
Select Sector SPDR Fund may also enter
into swaptions on either an asset-based or liability-based basis, depending on
whether the Select Sector SPDR Fund is
hedging its assets or its liabilities. Each Select Sector SPDR Fund may write
(sell) and purchase put and call swaptions
to the same extent it may make use of standard options on securities or other
instruments. Each Select Sector SPDR Fund may
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its
holdings, as a duration management technique, to protect against an increase in
the price of securities the Select Sector SPDR
Fund anticipates purchasing at a later date, or for any other purposes, such as
for speculation to increase returns.
Swaptions are generally subject to the same risks involved in a Select Sector
SPDR Fund's use of options.
Depending on the
terms of the particular option agreement, a Select Sector SPDR Fund will
generally incur a greater degree of risk when
it writes a swaption than it will incur when it purchases a swaption. When a
Select Sector SPDR Fund purchases a
swaption, it risks losing only the amount of the premium it has paid should it
decide to let the option expire unexercised.
However, when a Select Sector SPDR Fund writes a swaption, upon exercise of the
option the Select Sector SPDR Fund will
become obligated according to the terms of the underlying agreement.
Government
Regulation: The Dodd-Frank Wall
Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) that was signed into law
on July 21, 2010 created a new statutory framework that comprehensively
regulated the over-the-counter (“OTC”) derivatives
markets for the first time. Prior to the Dodd-Frank Act, the OTC derivatives
markets were traditionally traded
on a bilateral basis (so-called “bilateral OTC
transactions”). Under the
Dodd-Frank Act, certain OTC derivatives
transactions are now required to be centrally cleared and traded on
SEFs.
On October 28, 2020,
the SEC adopted Rule 18f-4 (the “Derivatives
Rule”) under the 1940 Act
which replaced prior SEC and staff guidance
with an updated, comprehensive framework for registered funds' use of
derivatives. The Derivatives Rule permits a
Select Sector SPDR Fund to enter into derivatives transactions and certain other
transactions notwithstanding the
restrictions on the issuance of “senior
securities” under Section 18 of
the 1940 Act. The Derivatives Rule requires the
Select Sector SPDR Funds to trade derivatives and certain other instruments that
create future payment or delivery
obligations subject to a value-at-risk (“VaR”) leverage limit,
develop and implement a derivatives risk management program
and new testing requirements, and comply with new requirements related to board
and SEC reporting. These
requirements apply unless a Select Sector SPDR Fund qualifies as a “limited derivatives
user,” as defined in the
Derivatives Rule. To the extent a Select Sector SPDR Fund uses derivatives,
complying with the Derivatives Rule may increase
the cost of a Select Sector SPDR Fund's investments and cost of doing business,
which could adversely affect
investors. Other new regulations could adversely affect the value, availability
and performance of certain derivative
instruments, may make them more costly, and may limit or restrict their use by
the Select Sector SPDR Funds.
Regulation
Under the Commodity Exchange Act: Each Select Sector
SPDR Fund intends to use commodity interests, such as futures,
swaps and options on futures in accordance with Rule 4.5 of the Commodity
Exchange Act (“CEA”). A Select Sector SPDR
Fund may use exchange-traded futures and options on futures, together with
positions in cash and money market
instruments, to simulate full investment in the Index. Exchange-traded futures
and options on futures contracts may not be
currently available for the Index. Under such circumstances, the Adviser may
seek to utilize other instruments that it
believes to be correlated to the applicable Index components or a subset of the
components. An exclusion from the
definition of the term “commodity pool
operator” has been claimed
with respect to each series of the Trust in accordance
with Rule 4.5 such that registration or regulation as a commodity pool operator
under the CEA is not necessary.
Restrictions
on Trading in Commodity Interests: Each Select Sector
SPDR Fund reserves the right to engage in transactions
involving futures, options thereon and swaps to the extent allowed by the CFTC
regulations in effect from time to time and in
accordance with the Select Sector SPDR Funds' policies. A Select Sector SPDR
Fund would take steps to prevent its futures
positions from “leveraging” its securities
holdings. When it has a long futures position, it will maintain with its custodian
bank assets substantially identical to those underlying the contract or cash and
equivalents (or a combination of the
foregoing) having a value equal to the net obligation of the Select Sector SPDR
Fund under the contract (less the
value of any margin deposits in connection with the position. When it has a
short futures position, it will maintain with its
custodian bank assets substantially identical to those underlying the contract
or cash and equivalents (or a combination of the
foregoing) having a value equal to the net obligation of the Select Sector SPDR
Fund under the contract (less the
value of any margin deposits in connection with the position).
Certain additional
risk factors related to derivatives are discussed below:
Derivatives
Risk:
Under recently adopted rules by the CFTC, transactions in some types of interest
rate swaps and index credit
default swaps on North American and European indices are required to be cleared.
In addition, the CFTC may
promulgate additional regulations that require clearing of other classes of
swaps. In a cleared derivatives
transaction (which includes futures, options on futures, and cleared swaps
transactions), a Select Sector SPDR Fund's
counterparty is a clearing house (such as CME, ICE Clear Credit or
LCH.Clearnet), rather than a bank or
broker. Since the Select Sector SPDR Funds are not members of a clearing house
and only members of a
clearing house can participate directly in the clearing house, each Select
Sector SPDR Fund holds cleared derivatives
through accounts at clearing members, who are futures commission merchants that
are members of the
clearing houses and who have the appropriate regulatory approvals to engage in
cleared derivatives
transactions. Each Select Sector SPDR Fund makes and receives payments owed
under cleared derivatives
transactions (including margin payments) through its accounts at clearing
members. Clearing members guarantee
performance of their clients' obligations to the clearing house. In contrast to
bilateral OTC transactions,
clearing members generally can require termination of existing cleared
derivatives transactions at any time and
increases in margin above the margin that it required at the beginning of a
transaction. Clearing houses also have
broad rights to increase margin requirements for existing transactions and to
terminate transactions in
accordance with their rules. Any such increase or termination could interfere
with the ability of a Select Sector SPDR
Fund to pursue its investment strategy. Also, each Select Sector SPDR Fund is
subject to execution risk if it
enters into a derivatives transaction that is required to be cleared (or that
the Advisor expects to be cleared), and no
clearing member is willing or able to clear the transaction on a Select Sector
SPDR Fund's behalf. While the
documentation in place between a Select Sector SPDR Fund and their clearing
members generally provides
that the clearing members will accept for clearing all transactions submitted
for clearing that are within credit
limits specified by the clearing members in advance, the Select Sector SPDR Fund
could be
subject to this
execution risk if the Select Sector SPDR Fund submits for clearing transactions
that exceed such credit limits, if
the clearing house does not accept the transactions for clearing, or if the
clearing members do not comply with their
agreement to clear such transactions. In that case, the transaction might have
to be terminated, and a Select Sector
SPDR Fund could lose some or all of the benefit of any increase in the value of
the transaction after
the time of the transaction. In addition, new regulations could, among other
things, restrict a Select Sector SPDR
Fund's ability to engage in, or increase the cost to the Select Sector SPDR Fund
of, derivatives
transactions, for example, by making some types of derivatives no longer
available to the Select Sector SPDR Fund or
increasing margin or capital requirements. If a Select Sector SPDR Fund is not
able to enter into a particular
derivatives transaction, the Select Sector SPDR Fund's investment performance
and risk profile could be adversely
affected as a result.
Counterparty
Risk:
Counterparty risk with respect to OTC derivatives may be affected by new
regulations promulgated by the
CFTC and SEC affecting the derivatives market. As described under “Derivatives
Risk” above, all futures and
options on futures and some swap transactions are required to be cleared, and a
party to a cleared derivatives
transaction is subject to the credit risk of the clearing house and the clearing
member through which it holds its cleared
derivatives position, rather than the credit risk of its original counterparty
to the derivative transaction.
Clearing members are required to segregate all funds received from customers
with respect to cleared derivatives
transactions from the clearing member's proprietary assets. However, all funds
and other property received by
a clearing broker from its customers are generally held by the clearing broker
on a commingled basis in
an omnibus account, and the clearing broker may also invest those funds in
certain instruments
permitted under the applicable regulations. Also, the clearing member transfers
to the clearing house the amount of margin
required by the clearing house for cleared derivatives transactions, which
amounts are generally held in
the relevant omnibus account at the clearing house for all customers of the
clearing member.
For commodities
futures positions, the clearing house may use all of the collateral held in the
clearing member's omnibus account to meet a
loss in that account, without regard to which customer in fact supplied that
collateral. Accordingly, in addition to bearing
the credit risk of its clearing member, each customer to a futures transaction
also bears “fellow customer” risk from other
customers of the clearing member. However, with respect to cleared swaps
positions, recent regulations
promulgated by the CFTC require that the clearing member notify the clearing
house of the amount of initial margin provided by
the clearing member to the clearing house that is attributable to each customer.
Because margin in respect of cleared
swaps must be earmarked for specific clearing member customers, the clearing
house may not use the collateral of one
customer to cover the obligations of another customer. However, if the clearing
member does not provide accurate reporting,
a Select Sector SPDR Fund is subject to the risk that a clearing house will use
the Select Sector SPDR Fund's assets
held in an omnibus account at the clearing house to satisfy payment obligations
of a defaulting customer of the
clearing member to the clearing house. In addition, clearing members may
generally choose to provide to the clearing house
the net amount of variation margin required for cleared swaps for all of its
customers in the aggregate, rather than the
gross amount for each customer.
Each Fund may invest
in illiquid investments. A Fund may not acquire any illiquid investment if,
immediately after the acquisition, the
Fund would have invested more than 15% of its net assets in illiquid
investments. An illiquid investment means any investment
that a Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days
or less without the sale or disposition significantly changing the market value
of the investment. If illiquid investments
exceed 15% of a Fund's net assets, certain remedial actions will be taken as
required by Rule 22e-4 under the 1940 Act
and the Funds' policies and procedures.
Special
Considerations and Risks
A discussion of the
risks associated with an investment in each Fund is contained in the Prospectus.
The discussion below supplements,
and should be read in conjunction with, the Prospectus.
Investment in a
Select Sector SPDR Fund should be made with an understanding that the value of a
Select Sector SPDR Fund's portfolio
securities may fluctuate in accordance with changes in the financial condition
of the issuers of the portfolio
securities, the value of securities generally and other
factors.
An investment in a
Select Sector SPDR Fund should also be made with an understanding of the risks
inherent in an investment in equity
securities, including the risk that the financial condition of issuers may
become impaired or that the general condition of
the securities markets may deteriorate (either of which may cause a decrease in
the value of the portfolio securities
and thus in the value of Shares). Securities are susceptible to general market
fluctuations and to volatile increases
and decreases in value as market confidence in and perceptions of their issuers
change. These investor perceptions are
based on various and unpredictable factors, including expectations regarding
government, economic, monetary and fiscal
policies, inflation and interest rates, economic expansion or contraction, and
global or regional political, economic
and banking crises. Securities of issuers traded on exchanges may be suspended
on certain exchanges by the
issuers themselves, by an exchange or by government authorities. Trading
suspensions may be applied from time to time to
the securities of individual issuers for reasons specific to that issuer, or may
be applied broadly by exchanges or
governmental authorities in response to market events. Suspensions may last for
significant periods of time, during which trading
in the securities and instruments that reference the securities, such as
derivative instruments, may be halted.
While S&P DJI
often chooses a replacement company for the S&P 500 with some
characteristics in common with a company or companies
removed from the index, it is not uncommon for a replacement company to have
little in common with the company it
replaces. Consequently, the removal of one company and its replacement by
another may affect two Select Sector
Indices and two Select Sector SPDR Funds, one of which included a company now
removed from the S&P 500 and another
which may have a company added to it.
Although most of the
securities in the Select Sector Indices are listed on a national securities
exchange, the principal trading market for
some of the securities in a Select Sector Index may be in the over-the-counter
market. The existence of a liquid trading
market for certain securities may depend on whether dealers will make a market
in such securities. There can be no assurance
that a market will be made or maintained or that any such market will be or
remain liquid. The price at which securities
may be sold and the value of a Select Sector SPDR Fund's Shares will be
adversely affected if trading markets for a Select
Sector SPDR Fund's portfolio securities are limited or absent or if bid/ask
spreads are wide.
FUTURES
AND OPTIONS TRANSACTIONS
There can be no
assurance that a liquid secondary market will exist for any particular futures
contract or option at any specific time. Thus,
it may not be possible to close a futures or options position. In the event of
adverse price movements, a Select Sector SPDR
Fund would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if
a Select Sector SPDR Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Select Sector
SPDR Fund may be required to make
delivery of the instruments underlying futures contracts it has
sold.
Each Select Sector
SPDR Fund will minimize the risk that it will be unable to close out a futures
or options contract by only entering into
futures and options for which there appears to be a liquid secondary
market.
The risk of loss in
trading futures contracts or uncovered call options in some strategies (e.g.,
selling uncovered index futures contracts)
is potentially unlimited. The Select Sector SPDR Funds do not plan to use
futures and options contracts, when available, in
this manner. The risk of a futures position may still be large as traditionally
measured due to the low margin deposits
required. In many cases, a relatively small price movement in a futures contract
may result in immediate and substantial loss
or gain to the investor relative to the size of a required margin deposit. A
Select Sector SPDR Fund, however, may utilize
futures and options contracts in a manner designed to limit its risk exposure to
that which is comparable to what
it would have incurred through direct investment in
securities.
Utilization of
futures transactions by a Select Sector SPDR Fund involves the risk of imperfect
or even negative correlation to its Select Sector
Index if the index underlying the futures contracts differs from the Select
Sector Index or if the futures contracts do not
track the Select Sector Index as expected. There is also the risk of loss by a
Select Sector SPDR Fund of margin deposits in
the event of bankruptcy of a broker with whom a Select Sector SPDR Fund has an
open position in the futures contract or
option.
Certain financial
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The
“daily price
fluctuation limit” or “daily
limit” establishes the
maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been
reached in a particular type of contract, generally no trades may be made on
that day at a price beyond that limit.
The daily limit governs only price movement during a particular trading day and
therefore does not limit
potential losses,
because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial
losses.
Swap agreements are
subject to the risk that the swap counterparty will default on its obligations.
If such a default occurs, a Select Sector SPDR
Fund will have contractual remedies pursuant to the agreements related to the
transaction, but such remedies may be
subject to bankruptcy and insolvency laws which could affect the Select Sector
SPDR Fund's rights as a
creditor.
The use of
interest-rate and index swaps is a highly specialized activity that involves
investment techniques and risks different from those
associated with ordinary portfolio security transactions. The use of a swap
requires an understanding not only of the
referenced asset, reference rate, or index, but also of the swap itself, without
the benefit of observing the performance of the
swap under all possible market conditions. These transactions generally do not
involve the delivery of securities or other
underlying assets or principal.
The absence of a
regulated execution facility or contract market and lack of liquidity for swap
transactions has led, in some instances, to
difficulties in trading and valuation, especially in the event of market
disruptions. Under recently adopted rules and
regulations, transactions in some types of swaps are required to be centrally
cleared. In a cleared derivatives
transaction, a Select Sector SPDR Fund's counterparty to the transaction is a
central derivatives clearing organization, or
clearing house, rather than a bank or broker. Because the Select Sector SPDR
Funds are not members of a clearing house,
and only members of a clearing house can participate directly in the clearing
house, each Select Sector SPDR Fund holds
cleared derivatives through accounts at clearing members. In cleared derivatives
transactions, a Select Sector SPDR Fund
will make payments (including margin payments) to and receive payments from a
clearing house through its accounts
at clearing members. Clearing members guarantee performance of their clients'
obligations to the clearing house.
Centrally cleared derivative arrangements may be less favorable to a Select
Sector SPDR Fund than bilateral
(non-cleared) arrangements. For example, a Select Sector SPDR Fund may be
required to provide greater amounts of margin
for cleared derivatives transactions than for bilateral derivatives
transactions. Also, in contrast to bilateral
derivatives transactions, in some cases following a period of notice to a Select
Sector SPDR Fund, a clearing member generally can
require termination of existing cleared derivatives transactions at any time or
an increase in margin requirements above
the margin that the clearing member required at the beginning of a transaction.
Clearing houses also have broad rights to
increase margin requirements for existing transactions or to terminate
transactions at any time in accordance with
their rules. A Select Sector SPDR Fund is subject to risk if it enters into a
derivatives transaction that is required to be
cleared (or which SSGA FM expects to be cleared), and no clearing member is
willing or able to clear the transaction on the
Select Sector SPDR Fund's behalf. In that case, the transaction might have to be
terminated, and the Select Sector SPDR
Fund could lose some or all of the benefit of the transaction, including loss of
an increase in the value of the
transaction and loss of hedging protection. In addition, the documentation
governing the relationship between a Select Sector SPDR
Fund and clearing members is drafted by the clearing members and generally is
less favorable to the Select Sector
SPDR Fund than typical bilateral derivatives documentation.
These clearing rules
and other new rules and regulations could, among other things, restrict a Select
Sector SPDR Fund's ability to engage
in, or increase the cost to the Select Sector SPDR Fund of, derivatives
transactions, for example, by making some types of
derivatives no longer available to the Select Sector SPDR Fund, increasing
margin or capital requirements, or
otherwise limiting liquidity or increasing transaction costs. These regulations,
as applicable to swaps, are relatively new and
evolving, so their potential impact on a Select Sector SPDR Fund and the
financial system are not yet known.
Because they are two
party contracts that may be subject to contractual restrictions on
transferability and termination and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid and subject to a Select Sector
SPDR Fund's limitation on investments in illiquid investments. To the extent
that a swap is not liquid, it may not be possible
to initiate a transaction or liquidate a position at an advantageous time or
price, which may result in significant losses.
Like most other investments, swap agreements are subject to the risk that the
market value of the instrument will
change in a way detrimental to a Select Sector SPDR Fund's
interest.
If a Select Sector
SPDR Fund uses a swap as a hedge against, or as a substitute for, a portfolio
investment, the Select Sector SPDR Fund
will be exposed to the risk that the swap will have or will develop imperfect or
no correlation with the portfolio
investment. This could cause substantial losses for the Select Sector SPDR Fund.
While hedging strategies involving swap
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting
favorable price movements in other Select Sector SPDR Fund investments. Many
swaps are complex and often valued
subjectively.
With the increased
use of technologies such as the Internet and the dependence on computer systems
to perform business and
operational functions, investment companies (such as the Funds) and their
service providers (including the Adviser) may be
prone to operational and information security risks resulting from cyber-attacks
and/or technological malfunctions. In
general, cyber-attacks are deliberate, but unintentional events may have similar
effects. Cyber-attacks include, among
others, stealing or corrupting data maintained online or digitally, preventing
legitimate users from accessing
information or services on a website, releasing confidential information without
authorization, and causing operational
disruption. Successful cyber-attacks against, or security breakdowns of, a Fund,
the Adviser, or a custodian, transfer agent, or
other affiliated or third-party service provider may adversely affect a Fund or
its shareholders. For instance,
cyber-attacks may interfere with the processing of shareholder transactions,
affect a Fund's ability to calculate its NAV, cause the
release of private shareholder information or confidential Fund information,
impede trading, cause reputational damage,
and subject the Fund to regulatory fines, penalties or financial losses,
reimbursement or other compensation costs,
and additional compliance costs. Cyber-attacks may render records of Fund assets
and transactions, shareholder
ownership of Fund Shares, and other data integral to the functioning of the Fund
inaccessible or inaccurate or incomplete. The
Funds may also incur substantial costs for cyber security risk management in
order to prevent cyber incidents in the
future. The Funds and their shareholders could be negatively impacted as a
result. While the Adviser has established business
continuity plans and systems designed to minimize the risk of cyber-attacks
through the use of technology,
processes and controls, there are inherent limitations in such plans and
systems, including the possibility that certain risks have
not been identified given the evolving nature of this threat. The Funds rely on
third-party service providers for many
of their day-to-day operations, and will be subject to the risk that the
protections and protocols implemented by those
service providers will be ineffective to protect the Fund from cyber-attack.
Similar types of cyber security risks also
are present for issuers of securities in which the Funds invest, which could
result in material adverse consequences for
such issuers, and may cause a Fund's investment in such securities to lose
value.
The method by which
Creation Units are purchased and traded may raise certain issues under
applicable securities laws. Because new Creation
Units are issued and sold by each Fund on an ongoing basis, at any point a
“distribution,” as such
term is
used in the Securities Act, may occur.
Broker-dealers and
other persons are cautioned that some activities on their part may, depending on
the circumstances, result in their
being deemed participants in a distribution in a manner which could render them
statutory underwriters and subject them to the
prospectus delivery and liability provisions of the Securities Act. For example,
a broker-dealer firm or its client may be
deemed a statutory underwriter if it takes Creation Units after placing an order
with the principal underwriter, breaks
them down into individual Fund Shares, and sells such Fund Shares directly to
customers, or if it chooses to couple
the creation of a supply of new Fund Shares with an active selling effort
involving solicitation of secondary market
demand for Fund Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must
take into account all the facts and circumstances pertaining to the activities
of the broker-dealer or its client in the
particular case, and the examples mentioned above should not be considered a
complete description of all the activities that
could lead to categorization as an underwriter.
Broker-dealer firms
should also note that dealers who are not “underwriters” but are effecting
transactions in Fund Shares, whether or not
participating in the distribution of Shares, are generally required to deliver a
prospectus or summary prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3) of the Securities
Act is not available with respect to such
transactions as a result of Section 24(d) of the 1940 Act. Firms that incur a
prospectus-delivery obligation with respect to Fund
Shares are reminded that under Securities Act Rule 153, a prospectus-delivery
obligation under Section 5(b)(2) of
the Securities Act owed to an exchange member in connection with a sale on the
Exchange is satisfied by the fact that a
Fund's Prospectus is available at the Exchange upon request. The prospectus
delivery mechanism provided in Rule 153
is only available with respect to transactions on an exchange.
SSGA or its
affiliates (the “Selling
Shareholder”) may purchase
Creation Units through a broker-dealer to “seed” (in whole
or in
part) Select Sector SPDR Funds as they are launched, or may purchase shares from
broker-dealers or other investors that have
previously provided “seed” for Select Sector
SPDR Funds when they were launched or otherwise in secondary market
transactions, and because the Selling Shareholder may be deemed an affiliate of
such Select Sector SPDR Funds, the Fund
Shares are being registered to permit the resale of these shares from time to
time after purchase. The Select Sector
SPDR Funds will not receive any of the proceeds from the resale by the Selling
Shareholders of these Fund
Shares.
The Selling
Shareholder intends to sell all or a portion of the Fund Shares owned by it and
offered hereby from time to time directly or
through one or more broker-dealers, and may also hedge such positions. The Fund
Shares may be sold on any national
securities exchange on which the Fund Shares may be listed or quoted at the time
of sale, in the over-the-counter market or in
transactions other than on these exchanges or systems at fixed prices, at
prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions,
which may involve cross or block transactions.
The Selling
Shareholder may also loan or pledge Fund Shares to broker-dealers that in turn
may sell such Fund Shares, to the extent
permitted by applicable law. The Selling Shareholder may also enter into options
or other transactions with broker-dealers or
other financial institutions or the creation of one or more derivative
securities which require the delivery to such
broker-dealer or other financial institution of Fund Shares, which Fund Shares
such broker-dealer or other financial
institution may resell.
The Selling
Shareholder and any broker-dealer or agents participating in the distribution of
Fund Shares may be deemed to be “underwriters” within the meaning
of Section 2(11) of the Securities Act in connection with such sales. In such
event, any commissions paid
to any such broker-dealer or agent and any profit on the resale of the Fund
Shares purchased by them may be deemed
to be underwriting commissions or discounts under the Securities Act. The
Selling Shareholder who may be deemed an
“underwriter” within the meaning
of Section 2(11) of the Securities Act will be subject to the applicable
prospectus delivery
requirements of the Securities Act.
A number of
countries in Europe, including Greece, Spain, Ireland, Italy, and Portugal, have
substantial government debt levels. The concern
over these debt levels has led to volatility in the European financial markets,
which has adversely affected the
exchange rate of the euro and may continue to significantly affect every country
in Europe. For some countries, the
ability to repay sovereign debt is in question, and default is possible, which
could affect their ability to borrow in the future.
Several countries have agreed to multi-year bailout loans from the European
Central Bank, the IMF, and other institutions. A
default or debt restructuring by any European country can adversely impact
holders of that country's debt and can affect
exposures to other European Union (“EU”) countries and
their financial companies as well. These financial difficulties may
continue, worsen or spread within or outside Europe. Responses to the financial
problems by European governments, central
banks and others, including austerity measures and reforms, may not work, may
result in social unrest and may limit
future growth and economic recovery or have other unintended
consequences.
Uncertainties
regarding the viability of the EU have impacted and may continue to impact
markets in the United States and around the
world. On January 31, 2020, the United Kingdom formally withdrew from the EU
(commonly referred to as “Brexit”) and entered an
11-month transition period. The transition period concluded on December 31,
2020, and the United Kingdom left
the EU single market and customs union under the terms of a new trade agreement.
The agreement governs the new
relationship between the United Kingdom and EU with respect to trading goods and
services, but critical aspects of the
relationship remain unresolved and subject to further negotiation and agreement.
Certain aspects of Brexit have had an adverse
impact on the region, leading to increased inflation, labor shortages and
business closures, among others. The full
scope and nature of the consequences of the exit are not at this time known and
are unlikely to be known for a significant
period of time. It is also unknown whether the United Kingdom's exit will
increase the likelihood of other countries also
departing the EU. Any additional exits from the EU, or the possibility of such
exits, may have a significant impact on the United
Kingdom, Europe, and global economies, which may result in increased volatility
and illiquidity, new legal and regulatory
uncertainties and potentially lower economic growth for such economies that
could potentially have an adverse effect on
the value of a Select Sector SPDR Fund's investments.
MARKET
TURBULENCE RESULTING FROM INFECTIOUS ILLNESS
A widespread
outbreak of an infectious illness, such as COVID-19, may lead to governments and
businesses world-wide taking aggressive
measures, including closing borders, restricting international and domestic
travel, and the imposition of prolonged
quarantines of large populations. As occurred in the wake of COVID-19, the
spread of such an illness may result in the
disruption of and delays in the delivery of healthcare services and processes,
the cancellation of organized events and
educational institutions, the disruption of production and supply chains, a
decline in consumer demand for certain goods and
services, and general concern and uncertainty, all of which may contribute to
increased volatility in global markets.
COVID-19, and other epidemics and pandemics that may arise in the future, could
adversely affect the economies of many
nations, the global economy, individual companies, sectors and industries, and
capital markets in ways that cannot be
foreseen at the present time. In addition, the impact of infectious diseases in
developing or emerging market countries may
be greater due to limited health care resources. Political, economic and social
stresses caused by infectious illness
also may exacerbate other pre-existing political, social and economic risks in
certain countries. The duration of such an
illness and its effects cannot be determined at this time, but the effects could
be present for an extended period of
time.
Sanctions threatened
or imposed by a number of jurisdictions, including the United States, the
European Union and the United Kingdom, and
other intergovernmental actions that have been or may be undertaken in the
future, against Russia, Russian entities or
Russian individuals, may result in the devaluation of Russian currency, a
downgrade in the country's credit rating, an
immediate freeze of Russian assets, a decline in the value and liquidity of
Russian securities, property or interests, and/or
other adverse consequences to the Russian economy or a Fund. The scope and scale
of sanctions in place at a
particular time may be expanded or otherwise modified in a way that have
negative effects on a Fund. Sanctions, or the
threat of new or modified sanctions, could impair the ability of a Fund to buy,
sell, hold, receive, deliver or otherwise
transact in certain affected securities or other investment instruments.
Sanctions could also result in Russia taking counter
measures or other actions in response, which may further impair the value and
liquidity of Russian securities. These
sanctions, and the resulting disruption of the Russian economy, may cause
volatility in other regional and global markets
and may negatively impact the performance of various sectors and industries, as
well as companies in other countries,
which could have a negative effect on the performance of a Fund, even if a Fund
does not have direct exposure to
securities of Russian issuers. As a collective result of the imposition of
sanctions, Russian government countermeasures and
the impact that they have had on the trading markets for Russian securities,
certain Funds have used, and may in the
future use, fair valuation procedures approved by the Fund's Board to
value certain Russian securities, which
could result in such securities being deemed to have a zero
value.
A reduction in
liquidity of certain Fund holdings as a result of sanctions and related actions
may cause a Fund to experience increased
premiums or discounts to its NAV and/or wider bid-ask spreads. Additionally, if
it becomes impracticable or
unlawful for a Fund to hold securities subject to, or otherwise affected by,
sanctions, or if deemed appropriate by the
Fund's investment adviser, the Fund may prohibit in-kind deposits of the
affected securities in connection with
creation transactions and instead require a cash deposit, which may also
increase the Fund's transaction costs.
The Trust has
adopted the following investment restrictions as fundamental policies with
respect to each Select Sector SPDR Fund. These
restrictions cannot be changed with respect to a Select Sector SPDR Fund without
the approval of the holders of a
majority of such Select Sector SPDR Fund's outstanding voting securities. For
purposes of the 1940 Act, a majority of the
outstanding voting securities of a Select Sector SPDR Fund means the vote, at an
annual or a special meeting of the
security holders of the Trust, of the lesser of (1) 67% or more of the voting
securities of the Select Sector SPDR Fund present at
such meeting, if the holders of more than 50% of the outstanding voting
securities of such Select Sector SPDR Fund are
present or represented by proxy, or (2) more than 50% of the outstanding voting
securities of the Select Sector SPDR
Fund. Except with the approval of a majority of the outstanding voting
securities, a Select Sector SPDR Fund may
not:
1.
Change its
investment objective;
2.
Lend any funds or
other assets except through the purchase of all or a portion of an issue of
securities or obligations of the
type in which it is permitted to invest (including participation interests in
such securities or obligations) and
except that a Select Sector SPDR Fund may lend its portfolio securities in an
amount not to exceed 33 1/3% of
the value of its total assets;
3.
Issue senior
securities or borrow money, except borrowings from banks for temporary or
emergency purposes in an amount up to 10%
of the value of the Select Sector SPDR Fund's total assets (including the amount
borrowed), valued at
market, less liabilities (not including the amount borrowed) valued at the time
the borrowing is made, and the
Select Sector SPDR Fund will not purchase securities while borrowings in excess
of 5% of the Select Sector SPDR
Fund's total assets are outstanding, provided, that for purposes of this
restriction, short-term credits necessary
for the clearance of transactions are not considered borrowings (this limitation
on purchases does not apply to
acceptance by the Select Sector SPDR Fund of a deposit principally of securities
included in the relevant Select
Sector Index for creation of Creation Units);
4.
Pledge, hypothecate,
mortgage or otherwise encumber its assets, except to secure permitted
borrowings. (The deposit of
underlying securities and other assets in escrow and collateral arrangements
with respect to initial or variation margin for
futures contracts or options contracts will not be deemed to be pledges of the
Select Sector SPDR Fund's
assets);
5.
Purchase, hold or
deal in real estate, or oil, gas or mineral interests or leases, but a Select
Sector SPDR Fund may purchase and
sell securities that are issued by companies that invest or deal in such
assets;
6.
Act as an
underwriter of securities of other issuers, except to the extent the Select
Sector SPDR Fund may be deemed an
underwriter in connection with the sale of securities in its
portfolio;
7.
Purchase securities
on margin, except for such short-term credits as are necessary for the clearance
of transactions, except
that a Select Sector SPDR Fund may make margin deposits in connection with
transactions in options, futures
and options on futures;
8.
Sell securities
short;
9.
Invest in
commodities or commodity contracts, except that a Select Sector SPDR Fund may
transact in exchange traded futures
contracts on securities, stock indexes and options on such futures contracts and
make margin deposits in
connection with such contracts.; or
10.
Concentrate its
investments in securities of issuers in the same industry or group of
industries, except that a Select Sector SPDR
Fund will be concentrated in an industry or group of industries to the extent
that such Fund's underlying index
concentrates in a particular industry or group of industries.(1)
In addition to the
investment restrictions adopted as fundamental policies as set forth above, each
Select Sector SPDR Fund observes the
following restrictions, which may be changed by the Board without a shareholder
vote. A Select Sector SPDR
Fund:
1.
Will not invest in
the securities of a company for the purpose of exercising management or control,
provided that the Trust may vote
the investment securities owned by each Select Sector SPDR Fund in accordance
with its views.
2.
Will, under normal
circumstances, invest at least 95% of its total assets in common stocks that
compose its relevant Select
Sector Index. Prior to any change in a Fund's 95% investment policy, a Fund will
provide shareholders with at
least 60 days' written notice.
3.
Will not invest in
securities issued by other investment companies so that, as determined
immediately after a purchase of such
securities is made: (i) not more than 5% of the value of the Fund's total assets
will be invested in the securities of
any one investment company; (ii) not more than 10% of the value of its total
assets will be invested in the
aggregate in securities of investment companies as a group; and (iii) not more
than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund.
If a percentage
limitation is adhered to at the time of investment or contract, a later increase
or decrease in percentage resulting from any
change in value or total or net assets will not result in a violation of such
restriction, except that the percentage
limitations with respect to the borrowing of money will be observed
continuously.
(1)
The SEC Staff
considers concentration to involve the investment of more than 25% of a fund's
assets in an industry or group of industries.
Exchange
Listing and Trading
A discussion of
exchange listing and trading matters associated with an investment in the Select
Sector SPDR Funds is contained in the
Prospectus under “PURCHASE AND SALE
INFORMATION” and “ADDITIONAL PURCHASE
AND SALE INFORMATION.” The discussion
below supplements, and should be read in conjunction with, the
Prospectus.
The Shares of each
Select Sector SPDR Fund are approved for listing and trading on the Exchange.
Shares trade on the Exchange at prices
that may differ to some degree from their net asset value. There can be no
assurance that the requirements of the
Exchange necessary to maintain the listing of Shares of a Select Sector SPDR
Fund will continue to be
met.
The Exchange may
consider the suspension of trading in, and may initiate delisting proceedings
of, the Shares of a Select Sector SPDR Fund
under any of the following circumstances: (i) if the Exchange becomes aware that
the Select Sector SPDR Fund is no
longer eligible to operate in reliance on Rule 6c-11 under the 1940 Act; (ii) if
the Select Sector SPDR Fund no longer
complies with the applicable listing requirements set forth in the Exchange's
rules; (iii) if, following the initial twelve-month
period after commencement of trading on the Exchange of the Select Sector SPDR
Fund, there are fewer than 50
beneficial holders of the Select Sector SPDR Fund; or (iv) if such other event
shall occur or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange inadvisable. The
Exchange will remove the Shares from
listing and trading upon termination of a Select Sector SPDR
Fund.
The Trust reserves
the right to adjust the Share price of a Select Sector SPDR Fund in the future
to maintain convenient trading ranges for
investors. Any adjustments would be accomplished through stock splits or reverse
stock splits, which would have no effect
on the net assets of the Select Sector SPDR Fund or an investor's equity
interest in the Select Sector SPDR
Fund.
As in the case of
other publicly traded securities, brokers' commissions on transactions will be
based on negotiated commission rates at
customary levels.
The following
information supplements and should be read in conjunction with the section in
the Prospectus entitled “MANAGEMENT.”
The Board has
responsibility for the oversight of the management, operations and business
affairs of the Trust, including general oversight of
its investment activities. The Trustees elect the officers of the Trust who are
responsible for administering the
day-to-day operations of the Trust and the Select Sector SPDR Funds.
The Trustees and
executive officers of the Trust, along with their year of birth, principal
occupations over the past five years, length of
time served, total number of portfolios overseen in the fund complex, public and
fund directorships held over the past five
years and other positions and their affiliations, if any, with the Adviser, are
listed below:
Name,
Address
and
Year of Birth |
|
Term
of
Office
and
Length
of
Time
Served |
Principal
Occupation(s)
During
Past
Five
Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee† |
Other
Directorships
Held
by
Trustee
During
Past
Five
Years |
|
|
ASHLEY
T. RABUN
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1952 |
Trustee,
Chair
of
the Board;
Member
of the
Audit
Committee,
Member
of the
Nominating
and
Governance
Committee |
Term:
Indefinite
Appointed:
October
2015
Elected:
October
2021 |
Retired;
President and
Founder,
InvestorReach,
Inc.,
a financial services
consulting
firm (1996 -
2015). |
|
Chairperson
of the
Board
and Member of
the
Audit, Nominating
and
Valuation
Committees,
Investment
Managers
Series Trust
(2007
- present). |
ALLISON
GRANT WILLIAMS
c/o
The Select Sector
SPDR
Trust |
Trustee;
Member
of the
Audit |
Term:
Indefinite
Elected: |
Retired;
Practice
Executive,
Global
Strategic
Relationship |
|
Leadership
Advisory
Committee
(2019 -
present)
and |
Name,
Address
and
Year of Birth |
|
Term
of
Office
and
Length
of
Time
Served |
Principal
Occupation(s)
During
Past
Five
Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee† |
Other
Directorships
Held
by
Trustee
During
Past
Five
Years |
One
Iron Street
Boston,
MA 02210
1956 |
Committee,
Member
of the
Nominating
and
Governance
Committee |
|
Management/Asset
Management
-
Corporate
& Institutional
Services
(C&IS)
Division,
Northern Trust
Corporation
(2017 -
2021);
and Chief
Operating
Officer &
Chief
Administrative
Officer,
Institutional
Investor
Group, N.A.,
C&IS
Division, Northern
Trust
Corporation (2016
-
2017). |
|
Membership
Committee
Chair
(2021 - present),
Art
Institute of Chicago;
Academic
Affairs Chair
and
Executive
Committee
Member
(2018
- Present) and
Board
of Trustees and
Investment
Committee
Member
(2012 -
present),
Columbia
College
Chicago. |
SHEILA
HARTNETT-DEVLIN
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1958 |
Trustee;
Member
of the
Audit
Committee,
Member
of the
Nominating
and
Governance
Committee |
Term:
Indefinite
Elected:
October
2021 |
Retired;
Senior Vice
President
and Head of
the
U.S. Institutional
Business,
American
Century
Investments,
Inc.
(2008 - 2017). |
|
Director,
South Jersey
Industries,
Inc. (energy
services)
(1999 -
present)
and Director,
Mannington
Mills
(flooring
products) (2005
-
present). |
JAMES
JESSEE
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1958 |
Trustee;
Member
of the
Audit
Committee,
Member
of the
Nominating
and
Governance
Committee |
Term:
Indefinite
Elected:
October
2021 |
Retired;
Strategic
Advisor,
MFS Investment
Management
(2018);
and
Co-Head, Global
Distribution
and
President
MFS Fund
Distributors,
Inc. (2011 -
2017). |
|
Trustee,
Yieldstreet
Prism
Fund (investment
company)
(2019 -
present);
Board Member,
Board
of Governors,
Investment
Company
Institute
(2014 - 2018);
Director,
Waddell &
Reed
Financial, Inc.
(investment
management)
(2019 -
2021). |
TERESA
POLLEY
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1960 |
Trustee;
Chair
of
the Audit
Committee,
Member
of the
Nominating
and
Governance
Committee |
Term:
Indefinite
Elected:
October
2021 |
Retired.
Terri Polley
Consulting
(2019 to
2021);
President and
Chief
Executive Officer
of
the Financial
Accounting
Foundation
(FAF)
(2008 - 2019). |
|
Director,
Fairfield County
Band
(2023 – Present);
Trustee
(2018 to
present),
Academic
Affairs
Committee
Member
(2018 -
present),
Audit
Committee
Chair (2021 -
present),
Executive
Committee
Member
(2021
- present),
Finance
and Operations
Committee
Member
(2018
- present), St.
Francis
University. |
R.
CHARLES TSCHAMPION
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1946 |
Trustee,
Member
of the
Audit
Committee,
Chair
of the
Nominating
and
Governance
Committee |
Term:
Indefinite
Elected:
October
1998 |
|
|
Trustee
Emeritus of
Lehigh
University. |
Name,
Address
and
Year of Birth |
|
Term
of
Office
and
Length
of
Time
Served |
Principal
Occupation(s)
During
Past
Five
Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee† |
Other
Directorships
Held
by
Trustee
During
Past
Five
Years |
|
|
JAMES
E. ROSS*
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1965 |
|
Term:
Indefinite
Appointed:
November
2005
Elected:
October
2021 |
President,
Winnisquam
Capital
LLC (December
2022
– present);
Non-Executive
Chairman,
Fusion
Acquisition
Corp. (June
2020
- September
2021);
Non-Executive
Chairman,
Fusion
Acquisition
Corp II
(February
2020 -
present):
Retired
Chairman
and Director,
SSGA
Funds
Management,
Inc. (2005
-
March 2020); Retired
Executive
Vice
President,
State Street
Global
Advisors (2012 -
March
2020); Retired
Chief
Executive Officer
and
Manager, State
Street
Global Advisors
Funds
Distributors, LLC
(May
2017 - March
2020);
Director, State
Street
Global Markets,
LLC
(2013 - April 2017);
President,
SSGA Funds
Management,
Inc. (2005
-
2012); Principal, State
Street
Global Advisors
(2000
- 2005). |
|
Investment
Managers
Series
Trust (December
2022
– present); SSGA
SPDR
ETFs Europe I
plc
(Director) (November
2016
– March 2020);
SSGA
SPDR ETFs
Europe
II plc (Director)
(November
2016 –
March
2020); State
Street
Navigator
Securities
Lending Trust
(July
2016 – March
2020);
SSGA Funds
(January
2014 – March
2020);
SSGA Active
Trust
(2011 - March
2020);
State Street
Institutional
Investment
Trust
(February 2007 –
March
2020); State
Street
Master Funds
(February
2007 – March
2020);
SPDR Series
Trust
(November 2005 -
December
2009; April
2010
- March 2020);
SPDR
Index Shares
Funds
(November 2005
-
December 2009; April
2010
- March 2020);
Elfun
Funds (July 2016 –
December
2018). |
RORY
TOBIN*
c/o
The Select Sector
SPDR
Trust
One
Iron Street
Boston,
MA 02210
1965 |
|
Term:
Indefinite
Elected:
October
2021 |
Executive
Vice President
and
Head of Business
EMEA,
Head of Global
SPDR
ETF, Member of
the
SSGA Global
Executive
Management
Group
(2014 - present). |
|
|
†
For the purpose of
determining the number of portfolios overseen by the Trustees, “Fund
Complex” comprises registered
investment companies for which SSGA Funds
Management, Inc. serves as investment adviser.
*
Mr. Ross and Mr.
Tobin are each an “interested
person” of the Trust, as
defined in the 1940 Act. Mr. Ross is an “interested
person” because of his
ownership interest in
an affiliate of the Adviser. Mr. Tobin is an “interested
person” because of his
position with an affiliate of the Adviser.
OFFICERS
Name,
Address
and
Year of Birth |
|
Term
of
Office
and
Length
of
Time
Served |
Principal
Occupation(s)
During
Past Five Years |
ANN
M. CARPENTER
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1966 |
President
and
Principal
Executive
Officer;
Deputy
Treasurer |
Term:
Unlimited
Served:
since
May
2023 (with
respect
to
President
and
Principal
Executive
Officer);
Term:
Unlimited
Served:
since
February
2016
(with
respect to
Deputy
Treasurer) |
Chief
Operating Officer, SSGA Funds Management, Inc.
(April
2005 - present)*; Managing Director, State Street
Global
Advisors (April 2005 - present).* |
BRUCE
S. ROSENBERG
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1961 |
Treasurer
and
Principal
Financial
Officer |
Term:
Unlimited
Served:
since
February
2016 |
Managing
Director, State Street Global Advisors and
SSGA
Funds Management, Inc. (July 2015 - present);
Director,
Credit Suisse (April 2008 - July 2015). |
CHAD
C. HALLETT
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1969 |
|
Term:
Unlimited
Served:
since
February
2016 |
Vice
President, State Street Global Advisors and SSGA
Funds
Management, Inc. (November 2014 - present). |
ANDREW
J. DELORME
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1975 |
|
Term:
Unlimited
Served:
since
February
2024 |
Managing
Director and Managing Counsel, State Street
Global
Advisors (March 2023 - present); Counsel, K&L
Gates
(February 2021 - March 2023); Vice President
and
Senior Counsel, State Street Global Advisors
(August
2014 - February 2021). |
DAVID
URMAN
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1985 |
|
Term:
Unlimited
Served:
since
August
2019 |
Vice
President and Senior Counsel, State Street Global
Advisors
(April 2019 - present); Vice President and
Counsel,
State Street Global Advisors (August 2015 -
April
2019); Associate, Ropes & Gray LLP (November
2012
- August 2015). |
DAVID
BARR
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1974 |
|
Term:
Unlimited
Served:
since
November
2020 |
Vice
President and Senior Counsel, State Street Global
Advisors
(October 2019 - present); Vice President and
Counsel,
Eaton Vance Corp. (October 2010 - October
2019). |
E.
GERARD MAIORANA, JR.
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1971 |
|
Term:
Unlimited
Served:
since
May
2023 |
Assistant
Vice President, State Street Global Advisors
(July
2014 - present). |
DARLENE
ANDERSON-VASQUEZ
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1968 |
|
Term:
Unlimited
Served:
since
November
2016 |
Managing
Director, State Street Global Advisors and
SSGA
Funds Management, Inc. (May 2016 - present);
Senior
Vice President, John Hancock Investments
(September
2007 - May 2016). |
ARTHUR
A. JENSEN
SSGA
Funds Management, Inc.
1600
Summer Street
Stamford,
CT 06905
1966 |
|
Term:
Unlimited
Served:
since
August
2017 |
Vice
President, State Street Global Advisors and SSGA
Funds
Management, Inc. (July 2016 - present); Mutual
Funds
Controller, GE Asset Management Incorporated
(April
2011 - July 2016). |
DAVID
LANCASTER
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1971 |
|
Term:
Unlimited
Served:
since
November
2020 |
Vice
President, State Street Global Advisors and SSGA
Funds
Management, Inc. (July 2017 - present); Assistant
Vice
President, State Street Bank and Trust Company
(November
2011 - July 2017).* |
Name,
Address
and
Year of Birth |
|
Term
of
Office
and
Length
of
Time
Served |
Principal
Occupation(s)
During
Past Five Years |
JOHN
BETTENCOURT
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1976 |
|
Term:
Unlimited
Served:
since
May
2022 |
Vice
President, State Street Global Advisors and SSGA
Funds
Management Inc. (March 2020 – present);
Assistant
Vice President, State Street Global Advisors
(June
2007 – March 2020). |
VEDRAN
VUKOVIC
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1985 |
|
Term:
Unlimited
Served:
since
February
2024 |
Vice
President, State Street Global Advisors (2023 –
present);
Assistant Vice President, Brown Brothers
Harriman
& Co. (2011 – 2023). |
BRIAN
HARRIS
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1973 |
Chief
Compliance
Officer;
Anti-Money
Laundering
Officer;
Code
of Ethics
Compliance
Officer |
Term:
Unlimited
Served:
since
November
2013 |
Managing
Director, State Street Global Advisors and
SSGA
Funds Management, Inc. (June 2013 -
present).* |
*
Served in various
capacities and/or with various affiliated entities during the noted time
period.
LEADERSHIP
STRUCTURE AND BOARD OF TRUSTEES
The Board has
general oversight responsibility with respect to the business and affairs of the
Trust. The Board is responsible for
overseeing the operations of the Funds in accordance with the provisions of the
1940 Act, other applicable laws and the Trust's
Declaration of Trust. The Board is composed of six Independent Trustees and two
Interested Trustees. In
accordance with the Board Governance Policies, the Board has appointed an
Independent Trustee to serve as Chairman of the
Board. Generally, the Board acts by majority vote of all of the Trustees,
including a majority vote of the Independent Trustees
if required by applicable law. The Trust's day-to-day operations are managed by
the Adviser and other service
providers who have been approved by the Board. The Board meets periodically
throughout the year to oversee the Trust's
activities, review contractual arrangements with service providers, oversee
compliance with regulatory requirements, and
review performance. The Board has determined that its leadership structure is
appropriate given the size of the Board,
the experience of each Trustee and the number and nature of Funds within the
Trust.
The Trustees were
selected to serve and continue on the Board based upon their skills, experience,
judgment, analytical ability, diligence,
ability to work effectively with other Trustees and a commitment to the
interests of shareholders and, with respect to the
Independent Trustees, a demonstrated willingness to take an independent and
questioning view of management. Each
Trustee also has familiarity with the Funds, the Adviser, the Administrator, the
Sub-Administrator and the Distributor, and
their operations. The Independent Trustees also have experience with the special
regulatory requirements
governing regulated investment companies and the special responsibilities of
investment company directors as a result of his
or her service as a Trustee of the Trust and/or as a director of other
investment companies. In addition to those
qualifications, the following is a brief summary of the specific experience,
qualifications or skills that led to the conclusion that, as
of the date of this SAI, each person identified below should serve as a Trustee
for the Trust. References to the
qualifications, attributes and skills of the Trustees are pursuant to
requirements of the SEC, and do not constitute a
representation that the Board or any Trustee has any special expertise and do
not impose any greater responsibility or
liability on any such person or on the Board by reason thereof. As required by
rules the SEC has adopted under the 1940 Act,
the Trust's Independent Trustees select and nominate all candidates for
Independent Trustee positions.
Ashley
T. Rabun. Ms. Rabun has
served as a Trustee of the Trust since October 2015 and has served as Chair of
the Board since June
2021. Ms. Rabun also serves on the Nominating and Governance Committee and the
Audit Committee. Since 2007, she has
also served as Chairperson of the Board and Member of the Audit Committee,
Valuation Committee and Nominating
Committee of Investment Managers Series Trust. From 1996 to 2015, Ms. Rabun
served as President and Chief Executive
Officer of InvestorReach, Inc., a financial services consulting firm. She served
as Partner and President of Mutual
Funds advised by Nicholas Applegate Capital Management from 1992 to 1996. From
1990 to 1992, Ms. Rabun served as
Marketing Director at InterInvest, Inc. Prior thereto, she was employed as a
registered representative for several
brokerage firms.
Allison
Grant Williams. Ms. Williams has
served as a Trustee of the Trust since October 2021. Ms. Williams also serves
on the
Nominating and Governance Committee and the Audit Committee. Ms. Williams
previously served as Senior Vice President in the
Global Strategic Relationship Management Group at Northern Trust/Corporate &
Institutional Services (C&IS) Division
from 2017 to 2021. Prior to that, Ms. Williams served as Chief Operating Officer
of Northern Trust's Global Funds
Services Group from 2014 to 2017, where she also served as Chief Administrative
Officer of Northern Trust's
Institutional Investor Services Group from 2016 to 2017. In addition, Ms.
Williams served as Chief Administrative Officer and Chief
Marketing Strategy Officer in Northern Trust's Exchange-Traded Funds Group/Asset
Management Division from 2011
to 2014. From 1987 to 2001 Ms. Williams held leadership positions with global
asset management firms of UBS and
Brinson Partners.
Sheila
Hartnett-Devlin. Ms.
Hartnett-Devlin has served as a Trustee of the Trust since October 2021. Ms.
Hartnett-Devlin also serves on the
Nominating and Governance Committee and the Audit Committee. Ms. Hartnett-Devlin
previously served as a Vice
President and Client Portfolio Manager from 2008 to 2011 and a Senior Vice
President and Head of U.S. Institutional
Business from 2011 to 2017 for American Century Investments, a large investment
product provider. From 2005 to 2008, she
served as Managing Director and Global Portfolio Manager at Cohen, Klingenstein
& Marks, Inc., a small investment
management firm and from 2002 to 2008, as Director at Mercy Investment Services,
a ministry of the Sisters of Mercy.
Prior to 2002, Ms. Hartnett-Devlin served in several roles, including Chief
Global Equity Strategist for Fiduciary Trust
Company International. Additionally, she has served on the board of directors of
South Jersey Industries since 1999, where
she chairs the Environmental Social and Governance Committee and sits on the
Audit Committee (Chair from 2007 to
2017) and Strategy and Finance Committees. Ms. Hartnett-Devlin also serves on
the board of directors of
Mannington Mills since 2005 and is the Chair of the Personnel and Compensation
Committee.
James
Jessee.
Mr. Jesse has served as a Trustee of the Trust since October 2021. Mr. Jessee
also serves on the Nominating and
Governance Committee and the Audit Committee. From 1987 to 2018, Mr. Jessee
served in numerous senior leadership
roles in the intermediary distribution space at MFS Investment Management,
including as President of MFS Funds
Distributors, Inc. and Co-Head of Global Distribution. Prior to 1987, Mr. Jessee
served as an insurance wholesaler. Since
October 2019, Mr. Jessee has served as member of the Board of Trustees of the
Yieldstreet Prism Fund. From
2019-2021, Mr. Jessee served on the Board of Directors for Waddell and Reed.
From 2014-2018, Mr. Jessee served as a Board
Member to the Board of Governors of the Investment Company
Institute.
Teresa
Polley.
Ms. Polley has served as a Trustee of the Trust since October 2021 and has been
designated by the Board as an
“audit committee
financial expert,” as defined in SEC
rules. Ms. Polley previously served as President and Chief Executive
Officer of the Financial Accounting Foundation (FAF) from 2008 until her
retirement in 2019. As President/CEO of FAF, Ms. Polley
advised and collaborated with FAF's governing body and committees on audit,
finance, investments,
compensation, governance, and nominations, including appointments to its
standard-setting bodies, the Financial Accounting
Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
She is a certified public
accountant licensed by the Commonwealth of Pennsylvania and is an experienced
audit committee chair.
James
E. Ross. Mr. Ross has
served as a Trustee of the Trust since 2005 and served as President from
November 2010 to May 2013. Mr.
Ross served in various executive capacities at the Adviser and its affiliates
from 2005 until his retirement in 2020. Mr. Ross
also serves as a Trustee of SPDR Series Trust, SPDR Index Shares Funds and SSGA
Active Trust, for which SSGA FM serves
as investment adviser. Since June 2010, Mr. Ross has chaired the Investment
Company Institute's Exchange-Traded
Funds Committee. Mr. Ross is also on the Board of Governors of the Investment
Company Institute.
R.
Charles Tschampion, CFA. Mr.
Tschampion has served as a Trustee of the Trust since inception in 1998. He also
serves
as Chair to the Nominating and Governance Committee and as a member of the Audit
Committee. Mr. Tschampion is a CFA
charterholder and served on the staff at the CFA Institute beginning in 2005
until August 2014. He retired from General Motors after
a 37-year career, including 28 years at General Motors Asset Management, where
his last position was Managing
Director of Investment Research and of Defined Contribution Plans. Mr.
Tschampion sat on the AIMR Board of Governors
from 1995 to 2001 and served as Chairman from 1999 to 2000. Mr. Tschampion was a
Trustee of Lehigh University
from 1998 to 2010 and served as Chair of the Investment Sub-Committee for the
Lehigh University Endowment Fund from
1998 to 2008; he currently is Trustee Emeritus of Lehigh University. Mr.
Tschampion also served as a Director, Chairman
of the Audit Committee and a member of the Nominating Committee of db-X
Exchange-Traded Funds Inc. (formerly
known as TDX Independence Funds, Inc.) from 2007 to 2015.
Rory
Tobin.
Mr. Tobin has served as a Trustee of the Trust since October 2021. He currently
serves as Executive Vice President and Head
of Business in Europe, the Middle East and Africa (EMEA) and head of the Global
SPDR Exchange Traded Fund (ETF)
business at SSGA since 2014. In addition. Mr. Tobin is a member of the SSGA
Global Executive Management Group.
Prior to joining SSGA, Mr. Tobin served as CEO and Global Head of the
Investments and Solutions
business at Barclays
Asset Management. From 2004 to 2014, Mr. Tobin held several roles at
BlackRock/Barclays Global Investors (BGI),
including as co-CEO of the Global iShares ETF business and as head of the Global
Index and Markets Group. Prior to
joining BGI, Mr. Tobin spent 14 years at Goldman Sachs where he held numerous
roles, including in equity capital markets,
equity derivative distribution, and distribution leadership.
The day-to-day
operations of the Funds, including the management of risk, are performed by
third party service providers, such as the Adviser,
Distributor, Administrator and Sub-Administrator. The Trustees are responsible
for overseeing the Trust's service
providers and thus have oversight responsibilities with respect to risk
management performed by those service providers.
Risk management seeks to identify and address risks, i.e., events or
circumstances that could have material adverse
effects on the business, operations, shareholder services, investment
performance or reputation of the Funds. The Trust and
its service providers employ a variety of processes, procedures and controls to
identify certain of those possible
events or circumstances, to lessen the probability of their occurrence and/or to
mitigate the effects of such events or
circumstances if they do occur.
Not all risks that
may affect the Funds can be identified nor can controls be developed to
eliminate or mitigate their occurrence or
effects. It may not be practical or cost effective to eliminate or mitigate
certain risks, the processes and controls employed to
address certain risks may be limited in their effectiveness, and some risks are
simply beyond the reasonable control
of the Funds or the Adviser or other service providers. Moreover, it is
necessary to bear certain risks (such as
investment-related risks) to achieve a Fund's goals. As a result of the
foregoing and other factors, the Funds' ability to manage
risk is subject to substantial limitations.
Risk oversight forms
part of the Board's general oversight of the Funds and is addressed as part of
various Board and Committee
activities. As part of its regular oversight of the Funds, the Board, directly
or through a Committee, interacts with and reviews
reports from, among others, the Adviser, the Trust's Chief Compliance Officer
and the independent registered public
accounting firm, as appropriate, regarding risks faced by the Funds. The Board
is responsible for overseeing the
nature, extent and quality of the services provided to the Funds by the Adviser
and receives information about those services
at its regular meetings. The Board has met with the Adviser's Chief Risk Officer
to review the Adviser's approach
to addressing risks. In addition, on an annual basis, in connection with its
consideration of whether to renew the Advisory
Agreement, the Board meets with the Adviser to review the services provided.
Among other things, the Board regularly
considers the Adviser's adherence to the Funds' investment restrictions and
compliance with various Fund policies and
procedures and with applicable securities regulations. The Board has appointed a
Chief Compliance Officer who oversees the
implementation and testing of the Trust's compliance program and reports to the
Board regarding compliance matters
for the Trust and its service providers. The Board, with the assistance of the
Adviser, reviews investment policies
and risks in connection with its review of the Funds' performance. In addition,
as part of the Board's oversight of the
Funds' advisory and other service provider agreements, the Board may
periodically consider risk management aspects
of their operations and the functions for which they are
responsible.
The Board has
established the following Committees and the membership of each Committee to
assist in its oversight functions, including
its oversight of the risks the Funds face. Committee membership is identified
below. Each Committee must report its
activities to the Board on a regular basis.
Audit
Committee: The Board has an
Audit Committee consisting of all Trustees who are not “interested
persons” (as defined by the 1940
Act) of the Trust. Ms. Polley serves as the Chairman. The primary purpose of the
Committee is to assist the Board in
fulfilling certain of its responsibilities. The Audit Committee serves as an
independent and objective party to monitor the
Funds' accounting policies, financial reporting and internal control system, as
well as the work of the independent
registered public accounting firm. The Audit Committee assists Board oversight
of (1) the quality and integrity of the Funds'
financial statements and the independent audit thereof; (2) the Funds'
accounting and financial reporting processes and
internal control over financial reporting; (3) the Funds' compliance with legal
and regulatory requirements that relate to the
Funds' accounting and financial reporting, internal control over financial
reporting and independent audits; and (4) the
qualifications, independence and performance of the Funds' independent
registered public accounting firm. The Audit
Committee meets with the Trust's independent auditors to review and approve the
scope and results of their professional
services; to review the procedures for evaluating the adequacy of the Trust's
accounting controls; to consider the range
of audit fees; and to make recommendations to the Board regarding the engagement
of the Trust's independent
auditors. The Audit Committee met three (3) times during the fiscal year ended
September 30, 2023.
Nominating
and Governance Committee: The Board has a
Nominating and Governance Committee consisting of all Trustees who are not
“interested
persons” (as defined by the
1940 Act) of the Trust. Mr. Tschampion serves as Chairman. The Nominating and
Governance Committee oversees administration of the Board Governance Policies
and will consider proposals for
candidates to serve as independent Trustees. Any such proposals should be sent
to the Trust in care of the Nominating and
Governance Committee Chairman. The final recommendation of a prospective
independent Trustee rests solely with the
Nominating and Governance Committee. The Nominating and Governance Committee
also periodically reviews Independent
Trustee compensation. The Nominating and Governance Committee met two (2) times
during the fiscal year ended
September 30, 2023.
When evaluating a
person as a potential nominee to serve as an independent Trustee, the Committee
will generally consider, among
other factors: age; education; relevant business experience; geographical
factors; whether the person is “independent” and otherwise
qualified under applicable laws and regulations to serve as a Trustee; and
whether the person is willing to
serve, and willing and able to commit the time necessary for attendance at
meetings and the performance of the
duties of an independent Trustee. The Committee also meets personally with the
nominees and conducts a reference
check. The final decision is based on a combination of factors, including the
strengths and the experience an
individual may bring to the Board. The Committee believes the Board generally
benefits from diversity of background,
experience and views among its members, and considers this a factor in
evaluating the composition of the Board, but has not
adopted any specific policy in this regard.
The Trust pays each
Trustee (other than Mr. Tobin) an annual retainer plus a per meeting fee for
each regularly scheduled meeting of the Board
attended by the Trustee (whether in person or telephonically) and any other
telephonic meeting. The Chairman of the
Board (who is an Independent Trustee) receives an additional fee. Audit
Committee and Nominating and Governance Committee
members receive per meeting fees and the Chairman of the Audit Committee and the
Chairman of the Nominating
and Governance Committee also receive an additional fee. The Trust may also
reimburse each Trustee for travel and other
out-of-pocket expenses incurred by him/her in connection with attending such
meetings and in connection with
attending industry seminars and meetings.
The following table
sets forth the total fees accrued with respect to the remuneration of Trustees
of the Trust for the fiscal year ended September
30, 2023:
|
|
Aggregate
Compensation
from
the Trust |
Pension
or
Retirement
Benefits
Accrued
as
Part
of
Trust
Expenses |
Estimated
Annual
Benefits
Upon
Retirement |
Total
Compensation
from
the
Trust
and
Fund
Complex
Paid
to
Trustees |
|
|
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(1)
Effective December
31, 2022, Ms. Burgermeister resigned from her position as Trustee and no
longer serves as a trustee to the Trust.
(2)
As an officer of
SSGA, Mr. Tobin does not receive any compensation from the Trust for serving as
a Trustee of the Trust.
During the fiscal
year ended September 30, 2023, no officers of the Trust received compensation in
excess of $60,000 from the Trust.
Additionally, no Trustee or officer of the Trust is entitled to any pension or
retirement benefits from the Trust.
The Trustee fees
with respect to the remuneration are allocated among the Funds based on net
assets. For the fiscal year ended September 30,
2023, the Funds contributed the following amounts:
|
|
|
The
Communication Services Select Sector SPDR Fund |
|
The
Consumer Discretionary Select Sector SPDR Fund |
|
The
Consumer Staples Select Sector SPDR Fund |
|
The
Energy Select Sector SPDR Fund |
|
The
Financial Select Sector SPDR Fund |
|
The
Health Care Select Sector SPDR Fund |
|
The
Industrial Select Sector SPDR Fund |
|
The
Materials Select Sector SPDR Fund |
|
The
Real Estate Select Sector SPDR Fund |
|
The
Technology Select Sector SPDR Fund |
|
The
Utilities Select Sector SPDR Fund |
|
As of December 31,
2023, neither the Independent Trustees nor their immediate family members owned
beneficially or of record any
securities in the Adviser, principal underwriter of the Funds or any person
(other than a registered investment company) directly or
indirectly controlling, controlled by, or under common control with the Adviser
or principal underwriter of the
Funds.
The following table
sets forth information describing the dollar range of equity securities
beneficially owned by each Trustee in the Trust
as of December 31, 2023:
|
|
|
Dollar
Range of Equity
Securities
in the Trust |
Aggregate
Dollar Range of Equity
Securities
in All
Funds
Overseen
by
Trustee in Family of
Investment
Companies |
|
|
|
|
|
|
|
|
|
|
|
|
The Financial
Select Sector SPDR Fund |
|
|
|
|
The Technology
Select Sector SPDR Fund |
|
|
|
|
The Energy
Select Sector SPDR Fund |
|
|
|
|
The
Communication Services Select Sector SPDR Fund |
|
|
|
|
The Consumer
Discretionary Select Sector SPDR Fund |
|
|
|
|
The Consumer
Staples Select Sector SPDR Fund |
|
|
|
|
The Energy
Select Sector SPDR Fund |
|
|
|
|
The Financial
Select Sector SPDR Fund |
|
|
|
|
The Health Care
Select Sector SPDR Fund |
|
|
|
|
The Industrial
Select Sector SPDR Fund |
|
|
|
|
The Materials
Select Sector SPDR Fund |
|
|
|
|
The Utilities
Select Sector SPDR Fund |
|
|
|
|
|
|
|
|
|
The Consumer
Discretionary Select Sector SPDR Fund |
|
|
|
|
The Energy
Select Sector SPDR Fund |
|
|
|
|
The Health Care
Select Sector SPDR Fund |
|
|
|
|
The Technology
Select Sector SPDR Fund |
|
|
|
|
The Financial
Select Sector SPDR Fund |
|
|
|
|
|
|
|
The Trust, the
Adviser and the Distributor each have adopted a Code of Ethics pursuant to Rule
17j-1 of the 1940 Act, which is designed to
prevent affiliated persons of the Trust, the Adviser and the Distributor from
engaging in deceptive, manipulative or
fraudulent activities in connection with securities held or to be acquired by
the Funds (which may also be held by persons
subject to the Codes of Ethics). Each Code of Ethics permits personnel, subject
to that Code of Ethics, to invest in securities
for their personal investment accounts, subject to certain limitations,
including securities that may be purchased or held by
the Funds.
There can be no
assurance that the Codes of Ethics will be effective in preventing such
activities. Each Code of Ethics, filed as exhibits to
the Trust's registration statement, may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the
SEC's website at https://www.sec.gov.
The Board has
delegated the responsibility to vote proxies on securities held by the Funds to
the Adviser for all Funds, subject to certain
exceptions. The Board has retained authority to vote proxies for certain bank
and bank holding company securities
(“Bank
Securities”) that may be held
by one or more Funds from time to time. The Board has adopted the Institutional
Shareholder Services, Inc.'s (“ISS”) benchmark proxy
voting policy with respect to voting such Bank Securities' proxies.
The Board has retained this authority in order to permit the Adviser to utilize
exemptions from limitations arising
under the Bank Holding Company Act of 1956, as amended, that might otherwise
prevent the Adviser from acquiring Bank
Securities on behalf of a Fund. Each of the Trust's and the Adviser's proxy
voting policies, as well as ISS' benchmark proxy
voting policy, are attached as an appendix to this SAI. Information regarding
how a Fund voted proxies relating to
its portfolio securities during the most recent twelve-month period ended June
30 is available: (1) without charge by
calling 1-866-732-8673; (2) on the Funds' website at https://www.sectorspdr.com; and (3) on the
SEC's website at
https://www.sec.gov.
DISCLOSURE
OF PORTFOLIO HOLDINGS POLICY
The Trust has
adopted a policy regarding the disclosure of information about the Trust's
portfolio holdings. The Board must approve all
material amendments to this policy. The Funds' portfolio holdings are publicly
disseminated each day a Fund is open for
business through financial reporting and news services including publicly
accessible Internet web sites. In addition, a
basket composition file, which includes the security names and share quantities
to deliver in exchange for Shares, together
with estimates and actual cash components, is publicly disseminated daily prior
to the opening of the Exchange via the
National Securities Clearing Corporation (“NSCC”). The basket
represents one Creation Unit of a Fund. The Trust, the
Adviser or State Street will not disseminate non-public information concerning
the Trust, except information may be made
available prior to its public availability: (i) to a party for a legitimate
business purpose related to the day-to-day operations of the
Funds, including (a) a service provider, (b) the stock exchanges upon which an
ETF is listed, (c) the NSCC, (d) the
Depository Trust Company, and (e) financial data/research companies such as
Morningstar, Bloomberg L.P., and Reuters, or (ii)
to any other party for a legitimate business or regulatory purpose, upon waiver
or exception, with the consent of an
applicable Trust officer.
Investment
Advisory and Other Services
SSGA FM acts as
investment adviser to the Trust and, subject to the oversight of the Board, is
responsible for the investment
management of each Select Sector SPDR Fund. As of September 30, 2023, the
Adviser managed approximately
$876.06 billion in assets. The Adviser's principal address is One Iron Street,
Boston, Massachusetts 02210. The Adviser, a
Massachusetts corporation, is a wholly-owned subsidiary of State Street Global
Advisors, Inc., which itself is a wholly-owned
subsidiary of State Street Corporation, a publicly held financial holding
company. State Street Global Advisors
(“SSGA”), consisting of the
Adviser and other investment advisory affiliates of State Street Corporation, is
the investment
management arm of State Street Corporation.
The Adviser serves
as investment adviser to each Select Sector SPDR Fund pursuant to an investment
advisory agreement
(“Investment Advisory
Agreement”) between the Trust
and the Adviser. Under the Investment Advisory Agreement, the
Adviser, subject to the oversight of the Board and in conformity with the stated
investment policies of each Select Sector SPDR
Fund, manages the investment of each Select Sector SPDR Fund's assets. The
Adviser is responsible for
placing purchase and sale orders and providing continuous supervision of the
investment portfolio of each Select Sector SPDR
Fund.
Pursuant to the
Investment Advisory Agreement, the Adviser is not liable for certain
liabilities, including certain liabilities arising under the
federal securities laws, unless such loss or liability results from willful
misfeasance, bad faith or gross negligence in the
performance of its duties or the reckless disregard of its obligations and
duties.
The Investment
Advisory Agreement with respect to each Select Sector SPDR Fund continues in
effect for one year from its effective date,
and thereafter is subject to annual approval by (1) the Board or (2) vote of a
majority of the outstanding voting securities
(as defined in the 1940 Act) of a Select Sector SPDR Fund, provided that in
either event such continuance also is
approved by a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Trust by a vote
cast in person at a meeting called for the purpose of voting on such approval.
The Investment Advisory Agreement with
respect to each Select Sector SPDR Fund is terminable without penalty, on 60
days' notice, by the Board or by a vote of the
holders of a majority of the applicable Select Sector SPDR Fund's outstanding
voting securities (as defined in the 1940
Act). The Investment Advisory Agreement is also terminable upon 60 days' notice
by the Adviser and will terminate
automatically in the event of its assignment (as defined in the 1940
Act).
A discussion
regarding the basis for the Board's approval of the continuation of the
Investment Advisory Agreement regarding all Funds
is available in the Trust's Annual Report to Shareholders for the period ended
September 30, 2023.
For the services
provided to each Fund under the Investment Advisory Agreement, each Fund pays
the Adviser a fee accrued daily and
payable monthly based on the Trust's average daily net assets at the following
annual rates: 0.05% of the first $12.5
billion of average daily net assets of the Trust, 0.04% of the next $17.5
billion of average daily net assets of the Trust, 0.035% of
the next $20.0 billion of average daily net assets of the Trust, 0.03% of the
next $50 billion of average daily net
assets of the Trust, 0.0285% of the next $50.0 billion of average daily net
assets of the Trust, 0.0271% of the next $50
billion of average daily net assets of the Trust, and 0.0256% of average daily
net assets on the remainder of net assets of the
Trust. The advisory fee is allocated to each series of the Trust pro rata based
upon the net assets of each series of the
Trust. For the fiscal year ended September 30, 2023, the fee pursuant to the
Investment Advisory Agreement was
equivalent to an effective rate of 0.0306% of average daily net assets for each
Fund.
From time to time,
the Adviser may waive all or a portion of its management fee, although it does
not currently intend to do so. The Adviser did
not waive any fees during the periods noted in the table below.
For the past three
fiscal years ended September 30, the Funds paid the following amounts to the
Adviser:
|
|
|
|
|
The
Communication Services Select Sector SPDR Fund |
|
|
|
The
Consumer Discretionary Select Sector SPDR Fund |
|
|
|
The
Consumer Staples Select Sector SPDR Fund |
|
|
|
The
Energy Select Sector SPDR Fund |
|
|
|
The
Financial Select Sector SPDR Fund |
|
|
|
The
Health Care Select Sector SPDR Fund |
|
|
|
The
Industrial Select Sector SPDR Fund |
|
|
|
The
Materials Select Sector SPDR Fund |
|
|
|
The
Real Estate Select Sector SPDR Fund |
|
|
|
The
Technology Select Sector SPDR Fund |
|
|
|
The
Utilities Select Sector SPDR Fund |
|
|
|
The Adviser manages
the Select Sector SPDR Funds using a team of investment professionals. The
professionals primarily
responsible for the day-to-day portfolio management of each Fund
are:
Portfolio
Management Team |
|
Karl
Schneider and Amy Cheng |
The
Real Estate Select Sector SPDR Fund |
Karl
Schneider, David Chin and Kala O'Donnell |
The
Technology Select Sector SPDR Fund |
Karl
Schneider and Dwayne Hancock |
The
Consumer Staples Select Sector SPDR Fund
The
Health Care Select Sector SPDR Fund
The
Utilities Select Sector SPDR Fund |
Karl
Schneider and Ted Janowsky |
The
Energy Select Sector SPDR Fund
The
Materials Select Sector SPDR Fund |
Karl
Schneider, Dwayne Hancock and Kala O'Donnell |
The
Financial Select Sector SPDR
Fund |
Portfolio
Management Team |
|
Karl
Schneider and Kala O'Donnell |
The
Communication Services Select Sector SPDR Fund
The
Consumer Discretionary Select Sector SPDR Fund |
Karl
Schneider, Emiliano Rabinovich and Amy Cheng |
The
Industrial Select Sector SPDR
Fund |
The following table
lists the number and types of accounts managed by each of the key professionals
involved in the day-to-day portfolio
management for the Funds and assets under management in those accounts. The
total number of accounts and assets
have been allocated to each respective manager. Therefore, some accounts and
assets have been counted
twice.
Other
Accounts Managed as of September 30, 2023
|
|
Registered
Investment
Company
Accounts |
Assets
Managed
(billions)* |
Other
Pooled
Investment
Vehicle
Accounts |
Assets
Managed
(billions)* |
|
Assets
Managed
(billions)* |
Total
Assets
Managed
(billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
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|
|
*
There are no
performance-based fees associated with these accounts.
None of the
portfolio managers listed above beneficially owned Fund Shares as of September
30, 2023, except as noted in the table
below:
|
|
|
Dollar
Range of Fund
Shares
Beneficially
Owned |
|
|
The Utilities
Select Sector SPDR Fund |
|
Conflicts
of Interest. A portfolio manager
that has responsibility for managing more than one account may be subject to
potential conflicts
of interest because he or she is responsible for other accounts in addition to
the Funds. Those conflicts could include
preferential treatment of one account over others in terms of: (a) the portfolio
manager's execution of different investment
strategies for various accounts; or (b) the allocation of resources or of
investment opportunities.
Portfolio managers
may manage numerous accounts for multiple clients. These accounts may include
registered investment
companies, other types of pooled accounts (e.g., collective investment funds),
and separate accounts (i.e., accounts managed on
behalf of individuals or public or private institutions). Portfolio managers
make investment decisions for each account
based on the investment objectives and policies and other relevant investment
considerations applicable to that portfolio. A
potential conflict of interest may arise as a result of a portfolio manager's
responsibility for multiple accounts with
similar investment guidelines. Under these circumstances, a potential investment
may be suitable for more than one of the
portfolio manager's accounts, but the quantity of the investment available for
purchase is less than the aggregate amount the
accounts would ideally allocate to the opportunity. Similar conflicts may arise
when multiple accounts seek to
dispose of the same investment. The portfolio managers may also manage accounts
whose objectives and policies differ
from that of the Funds. These differences may be such that under certain
circumstances, trading activity appropriate
for one account managed by the portfolio manager may have adverse consequences
for another account managed by
the portfolio manager. For example, an account may sell a significant position
in a security, which could cause the
market price of that security to decrease, while a Fund maintained its position
in that security.
A potential conflict
may arise when the portfolio managers are responsible for accounts that have
different advisory fees—the difference in
fees could create an incentive for the portfolio manager to favor one account
over another, for example, in terms of access to
investment opportunities. This conflict may be heightened if an account is
subject to a performance-based fee, as applicable.
Another potential conflict may arise when the portfolio manager has a personal
investment in one or more accounts
that participate in transactions with other accounts. His or her personal
investment(s) may create an incentive for the
portfolio manager to favor one account over another. The Adviser has adopted
policies and procedures reasonably designed
to address these potential material conflicts. For instance, portfolio managers
are normally
responsible for all
accounts within a certain investment discipline and do not, absent special
circumstances, differentiate among the various
accounts when allocating resources. Additionally, the Adviser and its advisory
affiliates have processes and procedures for
allocating investment opportunities among portfolios that are designed to
provide a fair and equitable allocation. With
respect to conflicts arising from personal investments, all employees, including
portfolio managers, must comply with personal
trading controls established by each of the Adviser's and Trust's Code of
Ethics.
SSGA's culture is
complemented and reinforced by a total rewards strategy that is based on a pay
for performance philosophy which
seeks to offer a competitive pay mix of base salary, benefits, cash incentives
and deferred compensation.
Salary is based on a
number of factors, including external benchmarking data and market trends, and
performance both at the business and
individual level. SSGA's Global Human Resources department regularly
participates in compensation surveys in order to
provide SSGA with market-based compensation information that helps support
individual pay decisions.
Additionally,
subject to State Street and SSGA business results, an incentive pool is
allocated to SSGA to reward its employees. The size
of the incentive pool for most business units is based on the firm's overall
profitability and other factors, including
performance against risk-related goals. For most SSGA investment teams, SSGA
recognizes and rewards performance
by linking annual incentive decisions for investment teams to the firm's or
business unit's profitability and business unit
investment performance over a multi-year period.
Incentive pool
funding for most active investment teams is driven in part by the post-tax
investment performance of fund(s) managed by the team
versus the return levels of the benchmark index(es) of the fund(s) on a one-,
three- and, in some cases, five-year
basis. For most active investment teams, a material portion of incentive
compensation for senior staff is deferred over a
four-year period into the SSGA Long-Term Incentive (“SSGA LTI”) program. For these
teams, The SSGA LTI program indexes
the performance of these deferred awards against the post-tax investment
performance of fund(s) managed by the team.
This is intended to align our investment team's compensation with client
interests, both through annual incentive
compensation awards and through the long-term value of deferred awards in the
SSGA LTI program.
For the index equity
investment team, incentive pool funding is driven in part by the post-tax 1 and
3-year tracking error of the funds managed by
the team against the benchmark indexes of the funds.
The discretionary
allocation of the incentive pool to the business units within SSGA is influenced
by market-based compensation data,
as well as the overall performance of each business unit. Individual
compensation decisions are made by the
employee's manager, in conjunction with the senior management of the employee's
business unit. These decisions are based
on the overall performance of the employee and, as mentioned above, on the
performance of the firm and business unit.
Depending on the job level, a portion of the annual incentive may be awarded in
deferred compensation, which
may include cash and/or Deferred Stock Awards (State Street stock), which
typically vest over a four-year period.
This helps to retain staff and further aligns SSGA employees' interests with
SSGA clients' and shareholders'
long-term interests.
SSGA recognizes and
rewards outstanding performance by:
•Promoting
employee ownership to connect employees directly to the company's
success.
•Using
rewards to reinforce mission, vision, values and business strategy.
•Seeking
to recognize and preserve the firm's unique culture and team
orientation.
•Providing
all employees the opportunity to share in the success of
SSGA.
THE
ADMINISTRATOR, SUB-ADMINISTRATOR, CUSTODIAN AND TRANSFER
AGENT
The
Administrator: SSGA FM serves as
the administrator to each series of the Trust, pursuant to an Administration
Agreement dated June
1, 2015, as amended, between SSGA FM and the Trust (the “SSGA Administration
Agreement”). Pursuant to the SSGA
Administration Agreement, SSGA FM is obligated to continuously provide business
management services to the
Trust and its series and will generally, subject to the general oversight of the
Trustees and, except as otherwise provided
in the SSGA Administration Agreement, manage all of the business and affairs of
the Trust. For its administration
services to the Funds, each Fund pays SSGA FM a fee accrued daily and paid
monthly at a rate of 0.0006% of its
average daily net assets.
The amount of fees
paid by each Fund to SSGA FM pursuant to the SSGA Administration Agreement for
the three most recently completed
fiscal years is set forth in the table below:
|
|
|
|
|
The
Communication Services Select Sector SPDR Fund |
|
|
|
The
Consumer Discretionary Select Sector SPDR Fund |
|
|
|
The
Consumer Staples Select Sector SPDR Fund |
|
|
|
The
Energy Select Sector SPDR Fund |
|
|
|
The
Financial Select Sector SPDR Fund |
|
|
|
The
Health Care Select Sector SPDR Fund |
|
|
|
The
Industrial Select Sector SPDR Fund |
|
|
|
The
Materials Select Sector SPDR Fund |
|
|
|
The
Real Estate Select Sector SPDR Fund |
|
|
|
The
Technology Select Sector SPDR Fund |
|
|
|
The
Utilities Select Sector SPDR Fund |
|
|
|
The
Sub-Administrator, Custodian and Transfer Agent: State Street serves
as the sub-administrator to each series of the Trust, pursuant to a
Sub-Administration Agreement dated June 1, 2015, as amended (the “Sub-Administration
Agreement”). Under the
Sub-Administration Agreement, State Street is obligated to provide certain
sub-administrative services to the
Trust and its series. State Street is a wholly-owned subsidiary of State Street
Corporation, a publicly held financial holding
company, and is affiliated with SSGA FM. State Street's mailing address is State
Street Financial Center, One Lincoln Street,
Boston, Massachusetts 02111.
State Street also
serves as Custodian for the Trust's series pursuant to a custodian agreement
(“Custodian
Agreement”). As Custodian, State
Street holds the Funds' assets, calculates the net asset value of each Select
Sector SPDR Fund's Shares and
calculates net income and realized capital gains or losses. State Street and the
Trust will comply with the self-custodian provisions of Rule
17f-2 under the 1940 Act.
State Street also
serves as Transfer Agent for each series of the Trust pursuant to a transfer
agency agreement (“Transfer
Agency
Agreement”).
Compensation: A “unitary” fee is paid by each
Select Sector SPDR Fund to State Street for custody, sub-administration
and
transfer agency services provided to the Select Sector SPDR Funds. The unitary
fee is calculated based upon the average daily net
assets of the Trust and allocated pro rata to each Select Sector SPDR Fund based
upon the relative net assets of each
Select Sector SPDR Fund. The unitary fee is calculated as follows: 0.015% for
the first $50 billion of net assets of the Trust,
0.0125% for the next $25 billion of net assets of the Trust, 0.01% for the next
$25 billion of net assets of the Trust,
0.0040% for the next $300 billion of net assets of the Trust, and 0.0025%
thereafter. In addition, State Street shall receive global
safekeeping and transaction fees, which are calculated on a per-country basis,
in-kind creation (purchase) and
redemption transaction fees (as described below) and revenue on certain cash
balances. State Street may be reimbursed by the
series of the Trust for its out-of-pocket expenses.
Additional
Sub-Administration Services: Also under the
Sub-Administration Agreement, each Select Sector SPDR Fund pays a fee to State
Street for certain services required in the preparation (including preparing a
schedule of quarterly portfolio
investments) and filing of Form N-PORT and Form N-CEN with the SEC (“N-PORT Related
Services”). Additionally, each
Select Sector SPDR Fund pays a fee to State Street for services regarding
certain liquidity analytics (“Liquidity Risk
Measurement Services”) under the
Sub-Administration Agreement. For N-PORT Related Services, each Select Sector SPDR
Fund pays State Street a fee of $10,300 per year. For Liquidity Risk Measurement
Services, each Select Sector SPDR
Fund pays State Street a fee of $1,800 per year.
SECURITIES
LENDING ACTIVITIES
The Trust's Board
has approved each Fund's participation in a securities lending program. Under
the securities lending program, each Fund
has retained State Street to serve as the securities lending agent.
For the fiscal year
ended September 30, 2023, the income earned by each Fund as well as the fees
and/or compensation paid by each Fund
(in dollars) pursuant to the Amended and Restated Securities Lending
Authorization Agreement between the Trust,
on behalf of its series, and State Street (the “Securities Lending
Authorization Agreement”) were as
follows:
|
|
Gross
income
earned
by
the
Fund
from
securities
lending
activities |
Fees
and/or compensation paid by the Fund for securities lending activities
and
related
services |
Aggregate
fees
and/or
compensation
paid
by
the
Fund
for
securities
lending
activities
and
related
services |
Net
income
from
securities
lending
activities |
|
Fees
paid
to
State
Street
from
a
revenue
split |
Fees
paid
for
any
cash
collateral
management
service
(including
fees
deducted
from
a
pooled
cash
collateral
reinvestment
vehicle)
that
are not
included
in a
revenue
split |
Admini-
strative
fees
not
included
in
a
revenue
split |
Indemnifi-
cation
fees
not
included
in
a
revenue
split |
Rebate
(paid
to
borrower) |
Other
fees
not
included
in
a
revenue
split |
The
Communication
Services
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Consumer
Discretionary
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Consumer
Staples
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Energy
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Financial
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Health Care
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Industrial
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Materials
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Real Estate
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Technology
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
The
Utilities
Select
Sector
SPDR
Fund |
|
|
|
|
|
|
|
|
|
For the fiscal year
ended September 30, 2023, State Street, acting as agent of the Funds, provided
the following services to the Funds in
connection with the Funds' securities lending activities: (i) locating borrowers
among an approved list of prospective
borrowers; (ii) causing the delivery of loaned securities from a Fund to
borrowers; (iii) monitoring the value of loaned securities,
the value of collateral received, and other lending parameters; (iv) seeking
additional collateral, as
necessary, from
borrowers; (v) receiving and holding collateral from borrowers, and facilitating
the investment and reinvestment of all
or substantially all cash collateral in an investment vehicle designated by the
Funds; (vi) returning collateral to
borrowers; (vii) facilitating substitute dividend, interest, and other
distribution payments to the Funds from borrowers; (viii)
negotiating the terms of each loan of securities, including but not limited to
the amount of any loan premium, and
monitoring the terms of securities loan agreements with prospective borrowers
for consistency with the requirements of the
Funds' Securities Lending Authorization Agreement; (ix) selecting securities,
including amounts (percentages), to be
loaned; (x) recordkeeping and accounting services; and (xi) arranging for return
of loaned securities to a Fund in
accordance with the terms of the Securities Lending Authorization
Agreement.
ALPS Portfolio
Solutions Distributor, Inc. (the “Distributor”) is the principal
underwriter and Distributor of Shares. Its principal address is
1290 Broadway, Suite 1000, Denver, Colorado 80203. Investor information can be
obtained by calling 1-866-732-8673. The
Distributor has entered into a distribution agreement (“Distribution
Agreement”) with the Trust
pursuant to which it
distributes Shares of each Select Sector SPDR Fund. The Distribution Agreement
will continue for one year from its
effective date and is renewable annually thereafter. Shares will be continuously
offered for sale by the Trust through the
Distributor only in Creation Units, as described in the Prospectus and below
under “PURCHASE AND
REDEMPTION OF
CREATION UNITS.” Shares in less than
Creation Units are not distributed by the Distributor. The Distributor will
deliver the Prospectus to persons purchasing Creation Units and will maintain
records of both orders placed with it and
confirmations of acceptance furnished by it. The Distributor is a broker-dealer
registered under the Securities Exchange
Act of 1934, as amended (the “Exchange
Act”), and is a member
of the Financial Industry Regulatory Authority
(“FINRA”). The Distributor
has no role in determining the investment policies of the Trust or which
securities are to be
purchased or sold by the Trust.
The Adviser or
Distributor, or an affiliate of the Adviser or Distributor, may directly or
indirectly make cash payments to certain
broker-dealers for participating in activities that are designed to make
registered representatives and other professionals more
knowledgeable about exchange traded products, including the SPDR funds, or for
other activities, such as participation in
marketing activities and presentations, educational training programs,
conferences, the development of technology platforms
and reporting systems.
The Board has
adopted a distribution and service plan pursuant to Rule 12b-1 under the 1940
Act (each, a “Plan”) for each Select Sector
SPDR Fund. The terms of each Plan are described in the Prospectus.
Under its terms,
each Select Sector SPDR Fund's Plan remains in effect from year to year,
provided such continuance is approved annually by
vote of the Board, including a majority of the Independent Trustees who have no
direct or indirect financial interest
in the operation of the Plan or any agreement related to the Plan. The Plan may
not be amended to increase materially
the amount to be spent for the services provided by the Distributor without
approval by the shareholders of the
Select Sector SPDR Fund to which the Plan applies, and all material amendments
of the Plan also require Board
approval (as described above). Each Plan may be terminated at any time, without
penalty, by vote of a majority of the
Independent Trustees, or by a vote of a majority of the outstanding voting
securities of such Select Sector SPDR Fund (as such
vote is defined in the 1940 Act). Pursuant to the Distribution Agreement, the
Distributor will provide the Board with
periodic reports of any amounts expended under the Plan and the purpose for
which such expenditures were
made.
The Distribution
Agreement provides that it may be terminated at any time, without the payment of
any penalty, as to each Select Sector SPDR
Fund: (i) by vote of a majority of the Independent Trustees or (ii) by vote of a
majority (as defined in the 1940 Act) of the
outstanding voting securities of the Select Sector SPDR Fund, on at least 60
days written notice to the Distributor. The
Distribution Agreement is also terminable upon 60 days' notice by the
Distributor and will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
Pursuant to
agreements entered into with such persons, the Distributor will make payments
under each Select Sector SPDR Fund's Plan to
certain broker-dealers or other persons (“Investor Services
Organizations”) that enter into
agreements with the
Distributor in the form approved by the Board to provide distribution assistance
and shareholder support, account
maintenance and educational and promotional services (which may include
compensation and sales incentives to the
registered brokers or other sales personnel of the broker-dealer or other
financial entity that is a party to an investor services
agreement) (“Investor Services
Agreements”). Each Investor
Services Agreement will be a “related agreement” under the Plan of
the relevant Select Sector SPDR Fund. No Investor Services Agreement will
provide for annual fees of more
than 0.10% of a Select Sector SPDR Fund's average daily net assets per annum
attributable to Shares subject to
such agreement.
Subject to an
aggregate limitation of 0.25% of a Select Sector SPDR Fund's average net assets
per annum, the fees paid by a Select Sector
SPDR Fund under its Plan will be compensation for distribution, investor
services or marketing services for that Fund. To
the extent the Plan fees aggregate less than 0.25% per annum of the average
daily net assets of a Select Sector SPDR
Fund, each Fund may also reimburse the Distributor and other persons for their
respective costs incurred in printing
prospectuses and producing advertising or marketing material prepared at the
request of the Fund. The aggregate
payments under each Plan will not exceed, on an annualized basis, 0.25% of
average daily net assets of any Select Sector
SPDR Fund. Notwithstanding the foregoing, the Board has voted to limit payments
under each Plan to an annual rate of
0.02% of a Fund's average daily net assets. This limitation is in effect through
at least January 31, 2025.
For the fiscal year
ended September 30, 2023, each Select Sector SPDR Fund paid the following amount
under its Plan:
|
|
Distributor's
Fee
(including
12b-1
Administration
Fee) |
|
|
The
Communication Services Select Sector SPDR Fund |
|
|
|
The
Consumer Discretionary Select Sector SPDR Fund |
|
|
|
The
Consumer Staples Select Sector SPDR Fund |
|
|
|
The
Energy Select Sector SPDR Fund |
|
|
|
The
Financial Select Sector SPDR Fund |
|
|
|
The
Health Care Select Sector SPDR Fund |
|
|
|
The
Industrial Select Sector SPDR Fund |
|
|
|
The
Materials Select Sector SPDR Fund |
|
|
|
The
Real Estate Select Sector SPDR Fund |
|
|
|
The
Technology Select Sector SPDR Fund |
|
|
|
The
Utilities Select Sector SPDR Fund |
|
|
|
*
Aggregate amount paid
for printing and mailing of prospectuses and other expenses.
The continuation of
the Distribution Agreement, any Investor Services Agreements and any other
related agreements is subject to annual
approval of the Board, including by a majority of the Independent Trustees, as
described above.
Each of the Investor
Services Agreements will provide that it may be terminated at any time, without
the payment of any penalty, (i) by vote
of a majority of the Independent Trustees or (ii) by vote of a majority of the
outstanding voting securities (as
defined in the 1940 Act) of the Select Sector SPDR Fund, on at least 60 days'
written notice to the other party. Each of the
Distribution Agreement and the Investor Services Agreements is also terminable
upon 60 days' notice by the Distributor
and will terminate automatically in the event of its assignment (as defined in
the 1940 Act). Each Investor Services
Agreement is also terminable by the applicable Investor Service Organization
upon 60 days' notice to the other party
thereto.
The allocation among
the Trust's series of fees and expenses payable under the Distribution Agreement
and the Investor Services Agreements
will be made pro rata in accordance with the daily net assets of the respective
series.
The Distributor may
also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit
purchases of Creation Unit
aggregations of Select Sector SPDR Fund Shares. Such Soliciting Dealers may also
be Participating Parties (as defined
in the “Book Entry Only
System” section below), DTC
Participants (as defined below) and/or Investor Services
Organizations.
Pursuant to the
Distribution Agreement, the Trust has agreed to indemnify the Distributor, and
may indemnify Soliciting Dealers and
Authorized Participants (as described below) entering into agreements with the
Distributor, for certain liabilities,
including certain liabilities arising under the federal securities laws, unless
such loss or liability results from willful misfeasance, bad
faith or gross negligence in the performance of its duties or the reckless
disregard of its obligations and duties under the
Distribution Agreement or other agreement, as applicable.
S&P Opco, LLC, a
subsidiary of S&P DJI and S&P Global (“S&P”) and NYSE Arca,
Inc. (either directly or through affiliates) have
entered into a license agreement with respect to each Fund's Select Sector
Index. The Trust has entered into a sublicense
agreement with S&P whereby each Fund pays an annual sub-license fee to
S&P based on a percentage of the Fund's total
expense ratio for the most recent fiscal year and applied to the Fund's average
daily net assets.
Brokerage
Transactions
All portfolio
transactions are placed on behalf of the Funds by the Adviser. Purchases and
sales of securities on a securities exchange
are affected through brokers who charge a commission for their services.
Ordinarily commissions are not charged on
over-the-counter orders (e.g., fixed income securities) because the Funds pay a
spread which is included in the cost of the
security and represents the difference between the dealer's quoted price at
which it is willing to sell the security and the
dealer's quoted price at which it is willing to buy the security. When a Fund
executes an over-the-counter order with an
electronic communications network or an alternative trading system, a commission
is charged by such electronic
communications networks and alternative trading systems as they execute such
orders on an agency basis. Securities may be
purchased from underwriters at prices that include underwriting
fees.
In placing a
portfolio transaction, the Adviser seeks to achieve best execution. The
Adviser's duty to seek best execution requires the Adviser
to take reasonable steps to obtain for the client as favorable an overall result
as possible for Fund portfolio
transactions under the circumstances, taking into account various factors that
are relevant to the particular transaction.
The Adviser refers
to and selects from the list of approved trading counterparties maintained by
the Adviser's Credit Risk Management team. In
selecting a trading counterparty for a particular trade, the Adviser seeks to
weigh relevant factors including, but not
limited to the following:
•Prompt
and reliable execution;
•The
competitiveness of commission rates and spreads, if
applicable;
•The
financial strength, stability and/or reputation of the trading
counterparty;
•The
willingness and ability of the executing trading counterparty to execute
transactions (and commit capital) of size in liquid and
illiquid markets without disrupting the market for the
security;
•Local
laws, regulations or restrictions;
•The
ability of the trading counterparty to maintain
confidentiality;
•The
availability and capability of execution venues, including electronic
communications networks for trading and execution management
systems made available to Adviser;
•Execution
related costs;
•History
of execution of orders;
•Likelihood
of execution and settlement;
•Clearance
and settlement capabilities, especially in high volatility market
environments;
•Availability
of lendable securities;
•Sophistication
of the trading counterparty's trading capabilities and
infrastructure/facilities;
•The
operational efficiency with which transactions are processed and cleared, taking
into account the order size and
complexity;
•Speed
and responsiveness to the Adviser;
•Access
to secondary markets;
•Counterparty
exposure; and
•Depending
upon the circumstances, the Adviser may take other relevant factors into account
if the Adviser believes that these are
important in taking all sufficient steps to obtain the best possible result for
execution of the order.
In selecting a
trading counterparty, the price of the transaction and costs related to the
execution of the transaction typically merit a
high relative importance, depending on the circumstances. The Adviser does not
necessarily select a trading counterparty
based upon price and costs but may take other relevant factors into account if
it believes that these are important in
taking reasonable steps to obtain the best possible result for a Fund under the
circumstances.
Consequently, the
Adviser may cause a client to pay a trading counterparty more than another
trading counterparty might have charged for the
same transaction in recognition of the value and quality of the brokerage
services provided. The following matters
may influence the relative importance that the Adviser places upon the relevant
factors:
(i)
The nature and
characteristics of the order or transaction. For example, size of order, market
impact of order, limits, or other
instructions relating to the order;
(ii)
The characteristics
of the financial instrument(s) or other assets which are the subject of that
order. For example, whether the order
pertains to an equity, fixed income, derivative or convertible
instrument;
(iii)
The characteristics
of the execution venues to which that order can be directed, if relevant. For
example, availability and
capabilities of electronic trading systems;
(iv)
Whether the
transaction is a ‘delivery versus payment' or ‘over-the-counter' transaction.
The creditworthiness of the trading
counterparty, the amount of existing exposure to a trading counterparty and
trading counterparty settlement
capabilities may be given a higher relative importance in the case of
‘over-the-counter' transactions; and/or
(v)
Any other
circumstances that the Adviser believes are relevant at the
time.
The process by which
trading counterparties are selected to effect transactions is designed to
exclude consideration of the sales efforts
conducted by broker-dealers in relation to the Funds.
The Adviser does not
currently use the Funds' assets in connection with third-party soft dollar
arrangements. While the Adviser does not
currently use “soft” or commission
dollars paid by the Funds for the purchase of third-party research, the
Adviser
reserves the right to do so in the future.
The Select Sector
SPDR Funds will not deal with affiliates in principal transactions unless
permitted by exemptive order or applicable rule or
regulation.
The table below
shows the aggregate dollar amount of brokerage commissions paid by the Funds for
the past three fiscal years ended
September 30. Brokerage commissions paid by a Fund may be substantially
different from year to year for multiple reasons,
including market volatility, the demand for a particular Fund, or increases or
decreases in trading volume.
|
|
|
|
|
The
Communication Services Select Sector SPDR Fund |
|
|
|
The
Consumer Discretionary Select Sector SPDR Fund |
|
|
|
The
Consumer Staples Select Sector SPDR Fund |
|
|
|
The
Energy Select Sector SPDR Fund |
|
|
|
The
Financial Select Sector SPDR Fund |
|
|
|
The
Health Care Select Sector SPDR Fund |
|
|
|
The
Industrial Select Sector SPDR Fund |
|
|
|
The
Materials Select Sector SPDR Fund |
|
|
|
The
Real Estate Select Sector SPDR Fund |
|
|
|
The
Technology Select Sector SPDR Fund |
|
|
|
The
Utilities Select Sector SPDR Fund |
|
|
|
Securities
of “Regular
Broker-Dealers”: The Select Sector
SPDR Funds are required to identify any securities of their “regular brokers and
dealers” (as such term is
defined in the 1940 Act) which they may hold at the close of their most
recent
fiscal year. “Regular brokers or
dealers” of the Trust are
the ten brokers or dealers that, during the most recent fiscal year: (i)
received the greatest dollar amounts of brokerage commissions from the Trust's
portfolio transactions; (ii) engaged as principal
in the largest dollar amounts of portfolio transactions of the Trust; or (iii)
sold the largest dollar amounts of the
Trust's Shares.
The Trust's holdings
in Securities of Regular Broker-Dealers as of September 30, 2023:
|
|
|
Goldman
Sachs Group, Inc. |
|
|
|
|
The Financial Select
Sector SPDR Fund invests in the shares of some of the Funds' regular
broker-dealers because those issuers are
components in the Financial Select Sector Index. In addition, a holding in The
Financial Select Sector SPDR Fund is a
security of an issuer affiliated with the Adviser and State Street.
Portfolio
Turnover: Portfolio turnover
may vary from year to year, as well as within a year. High turnover rates are
likely to result in
comparatively greater brokerage expenses or transaction costs. The overall
reasonableness of brokerage commissions and
transaction costs is evaluated by the Adviser based upon its knowledge of
available information as to the general level of
commissions and transaction costs paid by other institutional investors for
comparable services.
The following
information supplements and should be read in conjunction with the section in
the Prospectus entitled “ADDITIONAL PURCHASE
AND SALE INFORMATION.”
DTC acts as
securities depositary for the Shares. Shares of each Select Sector SPDR Fund are
represented by securities registered in the
name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of,
DTC. Except in the limited circumstance
provided below, certificates will not be issued for Shares.
DTC, a
limited-purpose trust company, was created to hold securities of its
participants (the “DTC
Participants”) and to
facilitate the
clearance and settlement of securities transactions among the DTC Participants
in such securities through electronic
book-entry changes in accounts of the DTC Participants, thereby eliminating the
need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own
DTC. More specifically, DTC is owned by a
number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and FINRA. Access
to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect
Participants”).
Beneficial ownership
of Shares is limited to DTC Participants, Indirect Participants and persons
holding interests through DTC Participants and
Indirect Participants. Ownership of beneficial interests in Shares (owners of
such beneficial interests are
referred to herein as “Beneficial
Owners”) is shown on, and
the transfer of ownership is effected only through, records
maintained by DTC (with respect to DTC Participants) and on the records of DTC
Participants (with respect to Indirect
Participants and Beneficial Owners that are not DTC Participants). Beneficial
Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of
Shares.
Conveyance
of all notices, statements and other communications to Beneficial Owners is
effected as follows.
Pursuant to the
Depositary Agreement between the Trust and DTC, DTC is required to make
available to the Trust upon request and for a
fee to be charged to the Trust a listing of the Shares of each Fund held by each
DTC Participant. The Trust, either
directly or through a third party service, shall inquire of each such DTC
Participant as to the number of Beneficial Owners
holding Shares, directly or indirectly, through such DTC Participant. The Trust,
either directly or through a third party
service, shall provide each such DTC Participant with copies of such notice,
statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice,
statement or communication may be transmitted by such DTC Participant, directly
or indirectly, to such Beneficial Owners.
In addition, the Trust shall pay to each such DTC Participant and/or third party
service a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory
requirements.
Share distributions
shall be made to DTC or its nominee, Cede & Co., as the registered holder of
all Shares. DTC or its nominee, upon
receipt of any such distributions, shall credit immediately DTC Participants'
accounts with payments in amounts
proportionate to their respective beneficial interests in Shares of a Fund as
shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of
customers in bearer form or registered in a “street
name,” and will be the
responsibility of such DTC Participants.
The Trust has no
responsibility or liability for any aspects of the records relating to or
notices to Beneficial Owners, or payments made on
account of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the
relationship between DTC and the DTC Participants
or the relationship between such DTC Participants and the Indirect Participants
and Beneficial Owners owning
through such DTC Participants.
DTC may determine to
discontinue providing its service with respect to Shares at any time by giving
reasonable notice to the Trust and
discharging its responsibilities with respect thereto under applicable law.
Under such circumstances, the Trust shall take
action either to find a replacement for DTC to perform its functions at a
comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other
arrangements with respect thereto satisfactory to the Exchange.
Control
Persons and Principal Holders of Securities
Although the Select
Sector SPDR Funds do not have information concerning their beneficial ownership
held in the names of DTC Participants,
as of January 2, 2024, the names, addresses and percentage ownership of each DTC
Participant that owned of record
5% or more of the outstanding Shares of the Select Sector SPDR Funds were as
follows:
|
|
|
|
THE
COMMUNICATION SERVICES SELECT
SECTOR
SPDR FUND |
Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
|
|
|
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
|
|
|
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
|
|
|
Barclays
Bank Plc, New York Branch/Barclays Bank Plc-Lnbr
1301
Sixth Avenue
New
York, NY 10019 |
|
THE
CONSUMER DISCRETIONARY SELECT
SECTOR
SPDR FUND |
Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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THE
CONSUMER STAPLES SELECT SECTOR
SPDR
FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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THE
ENERGY SELECT SECTOR SPDR FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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JPMorgan
Chase Bank, National Association
1111
Polaris Parkway
Columbus,
OH 43240 |
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National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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THE
FINANCIAL SELECT SECTOR SPDR FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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J.P.
Morgan Securities LLC/JPMC
383
Madison Ave
New
York, NY 10179 |
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National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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JPMorgan
Chase Bank, National Association
1111
Polaris Parkway
Columbus,
OH 43240 |
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Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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THE
HEALTH CARE SELECT SECTOR SPDR
FUND |
Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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|
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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|
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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|
|
Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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THE
INDUSTRIAL SELECT SECTOR SPDR FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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|
Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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|
Wells
Fargo Clearing Services, LLC
1
North Jefferson Avenue
St.
Louis, MO 63103 |
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THE
MATERIALS SELECT SECTOR SPDR FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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|
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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|
Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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Wells
Fargo Clearing Services, LLC
1
North Jefferson Avenue
St.
Louis, MO 63103 |
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State
Street Bank & Trust / State Street Total ETF
1776
Heritage Drive
North
Quincy, MA 02169 |
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THE
REAL ESTATE SELECT SECTOR SPDR
FUND |
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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Citibank,
N.A.
390
Greenwich Street, 3rd Floor
New
York, NY 10013 |
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Merrill
Lynch, Pierce, Fenner & Smith Incorporated
4803
Deer Lake Drive W
Jacksonville,
FL 32246 |
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LPL
Financial Corporation
4707
Executive Drive
San
Diego, CA 92121 |
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THE
TECHNOLOGY SELECT SECTOR SPDR
FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
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|
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
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|
|
Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
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|
|
Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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|
Wells
Fargo Clearing Services, LLC
1
North Jefferson Avenue
St.
Louis, MO 63103 |
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THE
UTILITIES SELECT SECTOR SPDR FUND |
JPMorgan
Chase Bank, National Association
1111
Polaris Parkway
Columbus,
OH 43240 |
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|
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
|
|
|
National
Financial Services LLC
499
Washington Blvd 4th Floor
Jersey
City, NJ 07310 |
|
|
|
Morgan
Stanley Smith Barney LLC
522
5th Avenue
New
York, NY 10036 |
|
|
|
Merrill
Lynch, Pierce, Fenner & Smith Incorporated
1
Bryant Park
New
York, NY 10036 |
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|
Citibank,
N.A.
390
Greenwich Street, 3rd Floor
New
York, NY 10013 |
|
An Authorized
Participant (as defined below) may hold of record more than 25% of the
outstanding Shares of a Fund. From time to time,
Authorized Participants may be a beneficial and/or legal owner of certain Funds,
may be affiliated with an index provider,
may be deemed to have control of the applicable Fund and may be able to affect
the outcome of matters presented
for a vote of the shareholders of such Fund(s). Authorized Participants may
execute an irrevocable proxy granting the
Distributor, State Street or an affiliate (the “Agent”) power to vote or
abstain from voting such Authorized Participant's
beneficially or legally owned Shares of the applicable Fund. In such cases, the
Agent shall mirror vote (or abstain from voting)
such Shares in the same proportion as all other beneficial owners of the
applicable Fund.
As of January 2,
2024, to the knowledge of the Trust, the following persons held of record or
beneficially through one or more accounts 25% or
more of the outstanding shares of the Fund:
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THE
REAL ESTATE SELECT SECTOR SPDR FUND |
Charles
Schwab & Co., Inc.
211
Main St
San
Francisco, CA 94105 |
|
As of December 31,
2023, the Trustees and officers of the Trust, as a group, owned less than 1% of
each Fund's outstanding
Shares.
Purchase
and Redemption of Creation Units
The Trust issues and
sells Shares of each Select Sector SPDR Fund only in Creation Units on a
continuous basis through the Distributor,
without a sales load (but subject to transaction fees), at their NAV per share
next determined after receipt, on any Business Day
(as defined below), of an order in proper form pursuant to the terms of the
Authorized Participant Agreement
(“Participant
Agreement”). A “Business
Day” with respect to
each Select Sector SPDR Fund is generally any day on which the
NYSE is open for business.
The consideration
for purchase of a Creation Unit of a Select Sector SPDR Fund generally consists
of the Deposit Securities and the
Cash Component, computed as described below. Together, the Deposit Securities
and the Cash Component constitute
the “Fund
Deposit,” which represents
the minimum initial and subsequent investment amount for a Creation Unit of any
Select Sector SPDR Fund. The Cash Component is an amount equal to the Dividend
Equivalent Payment (as defined
below), plus or minus, as the case may be, a Balancing Amount (as defined
below). The “Dividend
Equivalent
Payment” enables each Fund
to make a complete distribution of dividends on the day preceding the next
dividend payment
date, and is an amount equal, on a per Creation Unit basis, to the dividends on
all the portfolio securities of the
Fund (“Dividend
Securities”) with ex-dividend
dates within the accumulation period for such distribution (the “Accumulation
Period”), net of expenses
and liabilities for such period, as if all of the Dividend Securities had been
held by
the Fund for the entire Accumulation Period. The Accumulation Period begins on
the ex-dividend date for each Fund and ends on the
day preceding the next ex-dividend date. The “Balancing
Amount” is an amount equal
to the difference between
the net asset value of the Shares (per Creation Unit) and the “Deposit
Amount” — an amount equal
to the
sum of the market value of the Deposit Securities and the Dividend Equivalent
Payment. If the Balancing Amount is a positive number
(i.e., the net asset value per Creation Unit exceeds the Deposit Amount), the
Cash Component shall be increased by such
positive amount. If the Balancing Amount is a negative number (i.e., the net
asset value per Creation Unit is less than
the Deposit Amount), the Cash Component shall be decreased by such negative
amount. If the negative number is greater
than the Dividend Equivalent Payment, the creator will be entitled to receive
cash in an amount equal to the differential.
The Balancing Amount serves the function of compensating for any differences
between the net asset value per Creation
Unit and the Deposit Amount.
The Custodian,
through the NSCC, makes available on each Business Day, prior to the opening of
business on the Exchange (currently
9:30 a.m., Eastern time), the list of the names and the required number of
shares of each Deposit Security to be
included in the current standard Fund Deposit (based on information at the end
of the previous Business Day) for each Select
Sector SPDR Fund. Such standard Fund Deposit is subject to any applicable
adjustments as described below, in
order to effect purchases of Creation Units of a given Select Sector SPDR Fund
until such time as the next-announced
composition of the Deposit Securities is made available.
The identity and
number of shares of the Deposit Securities required for a Fund Deposit for each
Select Sector SPDR Fund may be changed
from time to time with a view to the investment objective of the applicable
Select Sector SPDR Fund. Information
regarding the Fund Deposit necessary for the purchase of a Creation Unit is made
available to Authorized
Participants and other market participants seeking to transact in Creation Unit
aggregations.
In addition, the
Trust reserves the right to permit or require the substitution of an amount of
cash — i.e., a “cash in
lieu”
amount
— to be added to the Cash Component to replace any Deposit Security which may
not be available in sufficient quantity for
delivery or which may not be eligible for transfer through the Clearing Process
(discussed below), or which may not be eligible
for trading by an Authorized Participant (as defined below) or the investor for
which it is acting (a “non-standard order”). Brokerage
commissions incurred in connection with acquisition of Deposit Securities not
eligible for transfer through the
systems of DTC and hence not eligible for transfer through the Clearing Process
(discussed below) will be at the
expense of the Fund and will affect the value of all Shares; but the Adviser,
subject to the approval of the Board, may adjust
the transaction fee within the parameters described above to protect ongoing
shareholders. The Trust also reserves the
right to include or remove Deposit Securities from the basket in anticipation of
portfolio changes. The adjustments
described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery
of the Fund Deposit, in the composition of the subject Select Sector Index being
tracked by the relevant Select
Sector SPDR Fund or resulting from certain corporate actions.
PROCEDURES
FOR PURCHASE OF CREATION UNITS
To be eligible to
place orders with the Distributor, as facilitated via the Transfer Agent, to
purchase a Creation Unit of a Select Sector SPDR
Fund, an entity must be (i) a “Participating
Party”, i.e., a
broker-dealer or other participant in the clearing process
through the Continuous Net Settlement System of the NSCC (the “Clearing
Process”), a clearing agency
that is
registered with the SEC; or (ii) a DTC Participant (see “BOOK ENTRY ONLY
SYSTEM”). In addition, each
Participating Party
or DTC Participant (each, an “Authorized
Participant”) must execute a
Participant Agreement that has been agreed to by
the Distributor and the Transfer Agent, and that has been accepted by the Trust,
with respect to purchases and
redemptions of Creation Units. Each Authorized Participant will agree, pursuant
to the terms of the Participant
Agreement, on behalf of itself or any investor on whose behalf it will act, to
certain conditions, including that it will pay to the
Trust, an amount of cash sufficient to pay the Cash Component together with all
applicable fees and taxes. All Shares of Select
Sector SPDR Funds, however created, will be entered on the records of DTC in the
name of Cede & Co. for the account
of a DTC Participant.
All orders to
purchase Shares directly from the Select Sector SPDR Funds, including
non-standard orders, must be placed for one or more
Creation Unit size aggregations of Shares and in the manner set forth in the
Participant Agreement and/or applicable order
form, which sets for specific procedures associated with purchases through the
Clearing Process and outside the Clearing
Process. Those placing orders through an Authorized Participant should allow
sufficient time to permit proper
submission of the purchase order by the cut-off time. SSGM may assist Authorized
Participants in assembling shares to
purchase Creation Units (or upon redemption), for which it may receive
commissions or other fees from such Authorized
Participants.
Investors should be
aware that an Authorized Participant may require orders for purchases of Shares
placed with it to be in the particular
form required by the individual Authorized Participant. In addition, the
Authorized Participant may request the investor to make
certain representations or enter into agreements with respect to the order,
e.g., to provide for payments of cash,
when required. Investors should also be aware that their particular broker may
not have executed a Participant
Agreement, and that, therefore, orders to purchase Creation Units of Select
Sector SPDR Funds have to be placed by the
investor's broker through an Authorized Participant that has executed a
Participant Agreement. At any given time there may be
only a limited number of broker-dealers that have executed a Participant
Agreement.
Creation Units may
be purchased in advance of receipt by the Trust of all or a portion of the
applicable Deposit Securities as described below.
In these circumstances, the initial deposit will have a value greater than the
net asset value of the Shares of a Select
Sector SPDR Fund on the date the order is placed in proper form since in
addition to available Deposit Securities, cash
must be deposited in an amount equal to the sum of (i) the Cash Component, plus
(ii) 115% of the market value of the
undelivered Deposit Securities (the “Additional Cash
Deposit”), which shall be
maintained in a separate
non-interest bearing collateral account, in accordance with the terms of the
Participant Agreement. An additional amount of cash shall
be required to be deposited with the Trust, pending delivery of the missing
Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to 115% of the daily marked to market
value of the missing Deposit Securities, in accordance with the terms of the
Participant Agreement. The Participant
Agreement will permit the Trust to buy the missing Deposit Securities at any
time. Authorized Participants will be liable to the
Trust for all costs, expenses, dividends, income and taxes associated with
missing Deposit Securities, including the costs
incurred by the Trust in connection with any such purchases. These costs will be
deemed to include the amount by which the
actual purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the
purchase order was deemed received by the Distributor plus the brokerage and
related transaction costs associated with such
purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit
Securities have been properly received by the Custodian or purchased by the
Trust and deposited into the Trust. The delivery
of Creation Units so purchased will occur no later than the second Business Day
following the day on which the purchase
order is deemed received by the Distributor. A creation request is considered to
be in “proper
form” if all procedures set
forth in the Participant Agreement, order form and this SAI are properly
followed.
ACCEPTANCE
OF ORDERS OF CREATION UNITS
The Trust reserves
the right to reject an order for Creation Units in respect of any Select Sector
SPDR Fund at its discretion,
including, without limitation, if (a) the order is not in proper form or the
Deposit Securities delivered do not consist of the
securities that the Custodian specified; (b) the investor(s), upon obtaining the
Shares ordered, would own 80% or more of the
currently outstanding Shares of any Select Sector SPDR Fund; (c) the Deposit
Securities delivered are not as
disseminated through the facilities of the NSCC for that date by the Custodian,
as described above; (d) the acceptance of the
Fund Deposit would, in the opinion of counsel, be unlawful; (e) the acceptance
or receipt of the order
for a Creation Unit
would, in the opinion of counsel to the Trust, be unlawful; or (f) in the event
that circumstances outside the control of the
Trust, the Custodian, the Transfer Agent, the Distributor and/or the Adviser
make it for all practical purposes not
feasible to process orders for Creation Units. Examples of such circumstances
include acts of God or public service or utility
problems such as fires, floods, extreme weather conditions and power outages
resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts;
systems failures involving computer or other information
systems affecting the Trust, the Custodian, the Transfer Agent, the Adviser, the
Distributor, DTC, NSCC or any other
participant in the creation process, and similar extraordinary events. The
Distributor shall communicate to the Authorized
Participant its rejection of the order. The Trust, the Transfer Agent, the
Custodian and the Distributor are under no duty, however, to
give notification of any defects or irregularities in the delivery of Fund
Deposits nor shall either of them incur any
liability for the failure to give any such notification. The Trust, the Transfer
Agent, the Custodian and the Distributor shall
not be liable for the rejection of any purchase order for Creation Units. Given
the importance of the ongoing issuance of
Creation Units to maintaining a market price that is at or close to the
underlying net asset value of a Fund, the Trust does
not intend to suspend acceptance of orders for Creation Units.
All questions as to
the number of shares of each security in the Deposit Securities and the
validity, form, eligibility and acceptance for
deposit of any securities to be delivered shall be determined by the Trust, and
the Trust's determination shall be final and
binding.
Investors will be
required to pay a fixed creation transaction fee of $500 for each Fund except
The Communication Services Select
Sector SPDR Fund. For The Communication Services Select Sector SPDR Fund, the
fixed creation transaction fee is
$250. An additional charge of up to three (3) times the fixed transaction fee
(expressed as a percentage of the value of the
Deposit Securities) may be imposed for (i) creations effected outside the
Clearing Process; (ii) non-standard orders; and (iii)
cash creations, for a total charge of up to $2,000 for each Fund except The
Communication Services Select
Sector SPDR Fund, and a total of up to $1,000 for The Communication Services
Select Sector SPDR Fund. Investors are
responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the
Trust.
Shares may be
redeemed only in Creation Units at their net asset value next determined after
receipt of a redemption request in proper
form by the Select Sector SPDR Fund through the Distributor and only on a
Business Day. EXCEPT UPON LIQUIDATION OF
A FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION
UNITS.
Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
in order to have such Shares redeemed by
the Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at
any time to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection
with assembling a sufficient number of Shares to constitute a redeemable
Creation Unit.
With respect to each
Select Sector SPDR Fund, the Custodian, through the NSCC, makes available prior
to the opening of business on the
Exchange (currently 9:30 a.m., Eastern time) on each Business Day, the list of
the names and share quantities of
securities designated by the Fund that will be applicable (subject to possible
amendment or correction) to redemption requests
received in proper form (as defined below) on that day (“Redemption
Securities”). Redemption
Securities received
on redemption may not be identical to Deposit Securities which are applicable to
purchases of Creation Units. The
identity and number of shares of the Redemption Securities or the Cash
Redemption Amount (defined below) may be
changed from time to time with a view to the investment objective of a Select
Sector SPDR Fund.
Unless cash
redemptions are available or specified for a Select Sector SPDR Fund, the
redemption proceeds for a Creation Unit
generally consist of Redemption Securities plus cash in an amount equal to the
difference between the net asset value of the
Shares being redeemed, as next determined after a receipt of a request in proper
form, and the value of the Redemption
Securities (the “Cash Redemption
Amount”), less a fixed
redemption transaction fee of $500. In the event that the
Redemption Securities have a value greater than the net asset value of the
Shares, a compensating cash payment equal to the
differential is required to be made by or through an Authorized Participant by
the redeeming shareholder.
REDEMPTION
TRANSACTION FEE
A fixed transaction
fee of $500 is applicable to each redemption transaction regardless of the
number of Creation Units redeemed in the
transaction for each Fund except The Communication Services Select Sector SPDR
Fund. For The Communication
Services Select Sector SPDR Fund, the fixed redemption transaction fee is $250.
An additional charge of up to three (3)
times the fixed transaction fee (for a total charge of up to $2,000 for each
Fund except The Communication Services Select
Sector SPDR Fund, and a total of up to $1,000 for The Communication Services
Select Sector SPDR Fund) may be charged
with respect to (i) transactions effected outside the Clearing Process; (ii)
non-standard orders; and (iii) in the limited
circumstances specified in which any cash may be used in lieu of securities to
redeem Creation Units.
PROCEDURES
FOR REDEMPTION OF CREATION UNITS
Orders to redeem
Creation Units must be submitted in proper form to the Distributor prior to the
time as set forth in the Participant
Agreement and/or applicable order form. A redemption request is considered to be
in “proper
form” if all procedures set forth
in the Participant Agreement, order form and this SAI are properly followed. If
the Distributor does not receive the
investor's Shares through DTC's facilities by the times and pursuant to the
other terms and conditions set forth in the Participant
Agreement, the redemption request shall be rejected.
The Authorized
Participant must transmit the request for redemption, in the form required by
the Trust, to the Distributor in accordance with
procedures set forth in the Participant Agreement and in accordance with the
applicable order form. Investors should be
aware that their particular broker may not have executed a Participant
Agreement, and that, therefore, requests to redeem
Creation Units may have to be placed by the investor's broker through an
Authorized Participant who has executed a
Participant Agreement. Investors making a redemption request should be aware
that such request must be in the form
specified by such Authorized Participant. Investors making a request to redeem
Creation Units should allow sufficient time to
permit proper submission of the request by an Authorized Participant to the
Distributor and transfer of the Shares to the
Trust's Transfer Agent; such investors should allow for the additional time that
may be required to effect redemptions through
their banks, brokers or other financial intermediaries if such intermediaries
are not Authorized Participants.
An Authorized
Participant submitting a redemption request is deemed to represent to the Trust
that, as of the close of that Business Day, it (or
its client) will own (within the meaning of Rule 200 of Regulation SHO) or has
arranged to borrow for delivery to the
Trust on or prior to the settlement date of the redemption request, the
requisite number of Shares of the relevant Fund to be
redeemed as a Creation Unit. In either case, the Authorized Participant is
deemed to acknowledge that: (i) it (or its
client) has full legal authority and legal right to tender for redemption the
requisite number of Shares of the applicable Fund and
to receive the entire proceeds of the redemption; and (ii) if such Shares
submitted for redemption have been loaned or
pledged to another party or are the subject of a repurchase agreement,
securities lending agreement or any other
arrangement affecting legal or beneficial ownership of such Shares being
tendered, there are no restrictions precluding the
tender and delivery of such Shares (including borrowed shares, if any) for
redemption, free and clear of liens, on the
redemption settlement date. The Trust reserves the right to verify these
representations at its discretion, but will typically
require verification with respect to a redemption request from a Fund in
connection with higher levels of redemption activity
and/or short interest in the Fund. If the Authorized Participant, upon receipt
of a verification request, does not provide
sufficient verification of its representations as determined by the Trust, the
redemption request will not be considered to have
been received in proper form and may be rejected by the Trust.
Deliveries of
redemption proceeds generally will be made within two business days.
In addition, a
Shareholder may request a redemption in cash which the Select Sector SPDR Fund
may, in its sole discretion, permit.
In either case, the Shareholder will receive a cash payment equal to the net
asset value of its Shares based on the net
asset value of Shares of the relevant Select Sector SPDR Fund next determined
after the redemption request is received
in proper form (minus a redemption transaction fee and additional charge for
requested cash redemptions
specified above, to offset the Trust's brokerage and other transaction costs
associated with the disposition of Redemption
Securities). The Select Sector SPDR Fund may also, in its sole discretion, upon
request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact composition of
the Redemption Securities but does not differ in
net asset value.
Redemptions of
Shares for Redemption Securities will be subject to compliance with applicable
federal and state securities laws and
each Select Sector SPDR Fund (whether or not it otherwise permits cash
redemptions) reserves the right to redeem
Creation Units for cash to the extent that the Trust could not lawfully deliver
specific Redemption Securities upon redemptions or
could not do so without first registering the Redemption Securities under such
laws. An Authorized
Participant or an
investor for which it is acting subject to a legal restriction with respect to a
particular security included in the Redemption
Securities applicable to the redemption of a Creation Unit may be paid an
equivalent amount of cash. The Authorized
Participant may request the redeeming Shareholder to complete an order form or
to enter into agreements with respect to such
matters as compensating cash payment, beneficial ownership of Shares or delivery
instructions.
The right of
redemption may be suspended or the date of payment postponed with respect to any
Select Sector SPDR Fund (1) for any
period during which the NYSE is closed (other than customary weekend and holiday
closings); (2) for any period during which
trading on the NYSE is suspended or restricted; (3) for any period during which
an emergency exists as a result of which
disposal of the Shares of the Select Sector SPDR Fund or determination of the
net asset value of the Shares is not
reasonably practicable; or (4) in such other circumstance as is permitted by the
SEC.
REQUIRED
EARLY ACCEPTANCE OF ORDERS
The Trust may, but
is not required to, accept orders until 4:00 p.m., Eastern time, or until the
market close (in the event the Exchange closes
early). Notwithstanding the foregoing, as described in the Participant Agreement
and the applicable order form,
Authorized Participants may be notified that the cut-off time for an order may
be earlier on a particular Business
Day.
Determination
of Net Asset Value
The following
information supplements and should be read in conjunction with the sections in
the Prospectus entitled “PURCHASE AND SALE
INFORMATION” and “ADDITIONAL PURCHASE
AND SALE INFORMATION.”
Net asset value per
Share for each Fund of the Trust is computed by dividing the value of the net
assets of such Select Sector SPDR Fund
(i.e., the value of its total assets less total liabilities) by the total number
of Shares outstanding. Expenses and fees,
including the management, administration and distribution fees, are accrued
daily and taken into account for purposes
of determining net asset value. The net asset value of each Fund is calculated
by the Custodian and determined as of the
close of the regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern
time) on each day that such exchange
is open.
In calculating a
Select Sector SPDR Fund's net asset value per Share, the Select Sector SPDR
Fund's investments are generally valued
using market valuations. A market valuation generally means a valuation (i)
obtained from an exchange, a pricing service,
or a major market maker (or dealer) or (ii) based on a price quotation or other
equivalent indication of value supplied by an
exchange, a pricing service, or a major market maker (or dealer). Each Select
Sector SPDR Fund relies on a
third-party service provider for assistance with the daily calculation of the
Select Sector SPDR Fund's NAV. The third-party
service provider, in turn, relies on other parties for certain pricing data and
other inputs used in the calculation of the
Select Sector SPDR Fund's NAV. Therefore, each Select Sector SPDR Fund is
subject to certain operational risks
associated with reliance on its service provider and that service provider's
sources of pricing and other data. NAV
calculation may be adversely affected by operational risks arising from factors
such as errors or failures in systems and
technology. Such errors or failures may result in inaccurately calculated NAVs,
delays in the calculation of NAVs and/or the
inability to calculate NAV over extended time periods. A Select Sector SPDR Fund
may be unable to recover any losses
associated with such failures. In the case of shares of other funds that are not
traded on an exchange, a market valuation
means such fund's published net asset value per share. Each Select Sector SPDR
Fund may use various pricing
services, or discontinue the use of any pricing service.
Pursuant to Board
approved valuation procedures, the Board has designated the Adviser as the
valuation designee for each Select Sector
SPDR Fund. These procedures address, among other things, (i) determining (a)
when market quotations are not
readily available or reliable and (b) the methodologies to be used for
determining the fair value of investments, and
(ii) the use and oversight of third-party pricing services for fair valuation.
The Adviser is responsible for periodically
reviewing the procedures, and the selected methodologies used, for their
continuing appropriateness and accuracy, and making
any changes or adjustments to the procedures and methodologies as
appropriate.
In the event that
current market valuations are not readily available or are deemed unreliable,
the Trust's procedures require the Adviser
to determine a security's fair value. In determining a fair value, the Adviser
may consider, among other things, (i) price
comparisons among multiple sources, (ii) a review of corporate actions and news
events, and (iii) a review of relevant
financial indicators (e.g., movement in interest rates, market indices, and
prices from the Index Provider). In these cases, a
Select Sector SPDR Fund's net asset value may reflect certain portfolio
securities' fair values rather than their market prices.
The fair value of a portfolio instrument is generally the price which a Select
Sector SPDR Fund might reasonably expect to
receive upon its current sale in an orderly market between market participants.
Ascertaining fair
value requires a
determination of the amount that an arm's-length buyer, under the circumstances,
would currently pay for the portfolio
instrument. Fair value pricing involves subjective judgments and it is possible
that the fair value determination for a security is
materially different than the value that could be realized upon the sale of the
security. In addition, fair value pricing could result
in a difference between the prices used to calculate a Select Sector SPDR Fund's
net asset value and the prices used by
the Select Sector SPDR Index. This may result in a difference between a Select
Sector SPDR Fund's performance and the
performance of the Select Sector SPDR Index.
Dividends
and Distributions
The following
information supplements and should be read in conjunction with the section in
the Prospectus entitled “DISTRIBUTIONS.”
Dividends from net
investment income, if any, are declared and paid quarterly for each Select
Sector SPDR Fund. Distributions of net
realized securities gains, if any, generally are declared and paid once a year,
but the Trust may make distributions on a
more frequent basis for certain Select Sector SPDR Funds to improve index
tracking or to comply with the distribution
requirements of the Internal Revenue Code, in all events in a manner consistent
with the provisions of the 1940 Act. In
addition, the Trust intends to distribute at least annually amounts representing
the full dividend yield on the underlying portfolio
securities of each Fund, net of expenses of such Fund, as if such Fund owned
such underlying portfolio securities
for the entire dividend period. As a result, some portion of each distribution
may result in a return of capital for tax
purposes for shareholders.
Dividends and other
distributions on Shares are distributed, as described below, on a pro rata basis
to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with
proceeds received from the Trust.
The Trust makes
additional distributions to the extent necessary (i) to distribute the entire
annual taxable income of the Trust, plus any net
capital gains and (ii) to avoid imposition of the excise tax imposed by Section
4982 of the Internal Revenue Code.
Management of the Trust reserves the right to declare special dividends if, in
its reasonable discretion, such action is
necessary or advisable to preserve the status of each Select Sector SPDR Fund as
a RIC or to avoid imposition of income
or excise taxes on undistributed income.
Broker dealers, at
their own discretion, may offer a dividend reinvestment service under which
Shares are purchased in the secondary market
at current market prices. Investors should consult their broker dealer for
further information regarding any
dividend reinvestment service offered by such broker dealer.
The following is a
summary of certain federal income tax considerations generally affecting the
Funds and their shareholders that
supplements the discussions in the Prospectus. No attempt is made to present a
comprehensive explanation of the
federal, state, local or foreign tax treatment of the Funds or their
shareholders, and the discussion here and in the
Prospectus is not intended to be a substitute for careful tax
planning.
The following
general discussion of certain federal income tax consequences is based on the
Internal Revenue Code and the regulations
issued thereunder as in effect on the date of this SAI. New legislation, as well
as 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.
The following
information should be read in conjunction with the section in the Prospectus
entitled “ADDITIONAL TAX
INFORMATION.”
Each Fund is treated
as a separate corporation for federal income tax purposes. A Fund therefore is
considered to be a separate entity in
determining its treatment under the rules for RICs described herein and in the
Prospectus. Losses in one series of the
Trust do not offset gains in any other series of the Trust and the requirements
(other than certain
organizational
requirements) for qualifying for treatment as a RIC are determined at the Fund
level rather than at the Trust level. Each Fund has
elected or will elect and intends to qualify each year to be treated as a
separate RIC under Subchapter M of the
Internal Revenue Code. As such, each Fund should not be subject to federal
income tax on its net investment income
and capital gains, if any, to the extent that it timely distributes such income
and capital gains to its shareholders. In
order to qualify for treatment as a RIC, a Fund must distribute annually to its
shareholders at least the sum of 90% of its
taxable net investment income (generally including the excess of net short-term
capital gains over net long-term capital
losses) and 90% of its net tax exempt interest income, if any (the “Distribution
Requirement”) and also
must
meet several additional requirements. Among these requirements are the
following: (i) at least 90% of a Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
certain securities loans, gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its
business of investing in such stock, securities or currencies, and net income
derived from interests in qualified publicly
traded partnerships (the “Qualifying Income
Requirement”); and (ii) at the
end of each quarter of a Fund's taxable year,
its assets must be diversified so that (a) at least 50% of the market value of
its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs and other
securities, with such other securities
limited, in respect to any one issuer, to an amount not greater in value than 5%
of the value of the Fund's total assets and to
not more than 10% of the outstanding voting securities of such issuer, and (b)
not more than 25% of the value of its
total assets is invested in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer,
the securities (other than securities of other RICs) of two or more issuers that
it controls and that are engaged in the same,
similar, or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships (the
“Diversification
Requirement”).
If a Fund fails to
satisfy the Qualifying Income Requirement or the Diversification Requirement in
any taxable year, such Fund 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. Additionally,
relief is provided for certain de minimis failures of
the Diversification Requirement where the Fund corrects the failure within a
specified period of time. In order to be eligible
for the relief provisions with respect to a failure to meet the Diversification
Requirement, a Fund may be required to
dispose of certain assets. If these relief provisions were not available to a
Fund and it were to fail to qualify for treatment as a
RIC for a taxable year, all of its taxable income would be subject to tax at the
applicable corporate rate without any
deduction for distributions to shareholders, and its distributions (including
capital gains distributions) generally would be taxable as
ordinary income dividends to its shareholders, subject to the dividends-received
deduction for corporate
shareholders and the lower tax rates on qualified dividend income received by
noncorporate shareholders. To requalify for
treatment as a RIC in a subsequent taxable year, the Fund would be required to
satisfy the RIC qualification requirements for
that year and to distribute any earnings and profits from any year in which the
Fund failed to qualify for tax treatment as a
RIC. If a Fund failed to qualify as a RIC for a period greater than two taxable
years, it would generally be required to pay a
Fund-level tax on certain net built-in gains recognized with respect to certain
of its assets upon a disposition of such
assets within five years of qualifying as a RIC in a subsequent year. The Board
reserves the right not to maintain the
qualification of a Fund for treatment as a RIC if it determines such course of
action to be beneficial to shareholders.
As discussed more
fully below, each Fund intends to distribute substantially all of its net
investment income and its capital gains for each
taxable year.
If a Fund meets the
Distribution Requirement but retains some or all of its income or gains, it will
be subject to federal income tax to the
extent any such income or gains are not distributed. A Fund may designate
certain amounts retained as undistributed net
capital gain in a notice to its shareholders, who (i) will be required to
include in income for U.S. federal income tax purposes,
as long-term capital gain, their proportionate shares of the undistributed
amount so designated, (ii) will be entitled to
credit their proportionate shares of the income tax paid by the Fund on that
undistributed amount against their federal income
tax liabilities and to claim refunds to the extent such credits exceed their
liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their Fund Shares by an
amount equal to the excess of the amount of
undistributed net capital gain included in their respective income over their
respective income tax credits. If a Fund failed to
satisfy the Distribution Requirement for any taxable year, it would be taxed as
a regular corporation, with consequences
generally similar to those described in the preceding paragraph.
Given the
concentration of certain of the Indexes in a relatively small number of
securities, it may not be possible for certain Funds to
fully implement sampling methodologies while satisfying the Diversification
Requirement. A Fund's efforts to satisfy the
Diversification Requirement may affect the Fund's execution of its investment
strategy and may cause the Fund's return to
deviate from that of the applicable Index, and the Fund's efforts to track the
applicable Index may cause it inadvertently to
fail to satisfy the Diversification Requirement.
A Fund will be
subject to a 4% excise tax on certain undistributed income if it does not
distribute to its shareholders in each calendar year
an amount at least equal to 98% of its ordinary income for the calendar year
plus 98.2% of its capital gain net income for
the twelve months ended October 31 of such year, subject to an increase for any
shortfall in the prior year's distribution.
Each Fund intends to declare and distribute dividends and distributions in the
amounts and at the times necessary to avoid
the application of this 4% excise tax.
A Fund 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 Fund's 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
Fund 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.
Capital losses in
excess of capital gains (“net capital
losses”) are not permitted
to be deducted against a RIC's net investment income.
Instead, for U.S. federal income tax purposes, potentially subject to certain
limitations, a Fund may carry a net capital
loss from any taxable year forward indefinitely to offset its capital gains, if
any, in years following the year of the loss. To
the extent subsequent capital gains are offset by such losses, they will not
result in U.S. federal income tax liability to the
Fund and may not be distributed as capital gains to its shareholders. Generally,
the Funds may not carry forward any losses
other than net capital losses.
TAXATION
OF SHAREHOLDERS—DISTRIBUTIONS
Each Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income (computed without
regard to the deduction for dividends paid), its net tax-exempt income, if any,
and any net capital gain (net recognized
long-term capital gains in excess of net recognized short-term capital losses,
taking into account any capital loss
carryforwards). Each Fund will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount
of distributions of net capital gain, the portion of dividends which may qualify
for the dividends-received deduction, and the
portion of dividends which may qualify for treatment as qualified dividend
income.
Subject to certain
limitations, dividends reported by a Fund as qualified dividend income will be
taxable to noncorporate shareholders at
reduced rates. Dividends may be reported by a Fund as qualified dividend income
if they are attributable to qualified
dividend income received by the Fund. Qualified dividend income includes, in
general, subject to certain holding period
requirements and other requirements, dividend income from certain U.S. and
foreign corporations. Subject to certain
limitations, eligible foreign corporations include those incorporated in
possessions of the United States, those incorporated in
certain countries with comprehensive tax treaties with the United States and
other foreign corporations if the stock with
respect to which the dividends are paid is tradable on an established securities
market in the United States. A dividend generally
will not be treated as qualified dividend income to the extent that (i) the
shareholder has not held the stock on which the
dividend was paid for more than 60 days during the 121-day period that begins on
the date that is 60 days before the date
on which the stock becomes ex-dividend with respect to such dividend or, in the
case of certain preferred stock, for
more than 90 days during the 181-day period beginning 90 days before such date,
(ii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially
similar or related property, or (iii) the shareholder elects to treat such
dividend as investment income under section 163(d)(4)(B)
of the Internal Revenue Code. The holding period requirements described in this
paragraph apply to shareholders'
investments in the Funds and to the Funds' investments in underlying
dividend-paying stocks. Dividends treated as received
by a Fund from a REIT or another RIC may be treated as qualified dividend income
generally only to the extent the
dividend distributions are attributable to qualified dividend income received by
such REIT or RIC. It is expected that any
dividends received by a Fund from a REIT and distributed by that Fund to a
shareholder generally will be taxable to the
shareholder as ordinary income. Additionally, income derived in connection with
a Fund's securities lending activities
will, in general, not be treated as qualified dividend income. If 95% or more of
a Fund's gross income (calculated without
taking into account net capital gain derived from sales or other dispositions of
stock or securities) consists of
qualified dividend income, that Fund may report all distributions of such income
as qualified dividend income.
Certain dividends
received by a Fund from U.S. corporations (generally, dividends received by a
Fund in respect of any share of stock (1)
with a tax holding period of at least 46 days during the 91-day period beginning
on the date that is 45 days before the date
on which the stock becomes ex-dividend as to that dividend and (2) that is held
in an unleveraged position) when
distributed and appropriately so reported by the Fund may be eligible for the
50% dividends-received deduction generally
available to corporations under the Internal Revenue Code. Dividends received by
a Fund from REITs will not be eligible
for that deduction. In order to qualify for the deduction, corporate
shareholders must meet the minimum
holding period
requirement stated above with respect to their Fund Shares, taking into account
any holding period reductions from
certain hedging or other transactions or positions that diminish their risk of
loss with respect to their Fund Shares, and, if they
borrow to acquire or otherwise incur debt attributable to Fund Shares, they may
be denied a portion of the
dividends-received deduction with respect to those Fund Shares. Any corporate
shareholder should consult its tax adviser regarding
the possibility that its tax basis in its Fund Shares may be reduced, for U.S.
federal income tax purposes, by reason of
“extraordinary
dividends” received with
respect to the Fund Shares and, to the extent such basis would be reduced below zero,
current recognition of income may be required.
Distributions from a
Fund's net short-term capital gains will generally be taxable to shareholders as
ordinary income. Distributions from a
Fund's net capital gain will be taxable to shareholders at long-term capital
gains rates, regardless of how long
shareholders have held their Shares. Long-term capital gains are generally taxed
to noncorporate shareholders at reduced rates.
Certain capital gain dividends attributable to dividends a Fund receives from
REITs may be taxable to noncorporate
shareholders at a rate other than the reduced rates generally applicable to
long-term capital gains.
Although dividends
generally will be treated as distributed when paid, any dividend declared by a
Fund in October, November or December
and payable to shareholders of record in such a month that is paid during the
following January will be treated for
U.S. federal income tax purposes as received by shareholders on December 31 of
the calendar year in which it was
declared.
If a Fund's
distributions exceed its earnings and profits, all or a portion of the
distributions made in the taxable year may be treated as a
return of capital to shareholders. A return of capital distribution generally
will not be taxable but will reduce the shareholder's
cost basis and result in a higher capital gain or lower capital loss when the
Fund Shares on which the distribution was
received are sold. After a shareholder's basis in the Fund Shares has been
reduced to zero, distributions in excess of
earnings and profits will be treated as gain from the sale of the shareholder's
Fund Shares.
Under Section 163(j)
of the Code, a taxpayer's business interest expense is generally deductible to
the extent of its business interest
income plus certain other amounts. If a Fund earns business interest income, it
may report a portion of its dividends as
“Section 163(j)
interest dividends,” which its
shareholders may be able to treat as business interest income for purposes
of Section 163(j) of the Code. The Fund's “Section 163(j)
interest dividend” for a tax year will
be limited to the
excess of its business interest income over the sum of its business interest
expense and other deductions properly allocable
to its business interest income. In general, a Fund's shareholders may treat a
distribution reported as a Section 163(j)
interest dividend as interest income only to the extent the distribution exceeds
the sum of the portions of the distribution
reported as other types of tax-favored income. To be eligible to treat a Section
163(j) interest dividend as interest income, a
shareholder may need to meet certain holding period requirements in respect of
Fund Shares and must not have hedged its
position in Fund Shares in certain ways.
Distributions that
are reinvested in additional Fund Shares through the means of a dividend
reinvestment service, if offered by your
broker-dealer, will nevertheless be taxable dividends to the same extent as if
such dividends had been received in
cash.
A 3.8% Medicare
contribution tax generally applies to all or a portion of the net investment
income of a shareholder who is an individual and
not a nonresident alien for federal income tax purposes and who has adjusted
gross income (subject to certain adjustments)
that exceeds a threshold amount ($250,000 if married filing jointly or if
considered a “surviving
spouse” for federal income
tax purposes, $125,000 if married filing separately, and $200,000 in other
cases). This 3.8% tax also applies to
all or a portion of the undistributed net investment income of certain
shareholders that are estates and trusts. For these
purposes, dividends, interest and certain capital gains (generally including
capital gain distributions and capital gains
realized on the sale of Fund Shares) are generally taken into account in
computing a shareholder's net investment
income.
Distributions of
ordinary income and capital gains may also be subject to foreign, state and
local taxes depending on a shareholder's
circumstances.
TAXATION
OF SHAREHOLDERS – SALE OF FUND SHARES
In general, a sale
of Fund Shares results in capital gain or loss, and for individual shareholders,
is taxable at a federal rate dependent upon the
length of time the Fund Shares were held. A sale of Fund Shares held for a
period of one year or less at the time of
such sale will, for tax purposes, generally result in short-term capital gains
or losses, and a sale of those held for more
than one year will generally result in long-term capital gains or losses.
Long-term capital gains are generally taxed to
noncorporate shareholders at reduced rates.
Gain or loss on the
sale of Fund Shares is measured by the difference between the amount received
and the adjusted tax basis of the Fund
Shares. Shareholders should keep records of investments made (including Fund
Shares acquired through reinvestment
of dividends and distributions) so they can compute the tax basis of their Fund
Shares.
A loss realized on a
sale of Fund Shares may be disallowed if substantially identical Fund Shares are
acquired (whether through the
reinvestment of dividends or otherwise) within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty
(30) days after the date that the Fund Shares are disposed of. In such a case,
the basis of the Fund Shares acquired must
be adjusted to reflect the disallowed loss. Any loss upon the sale of Fund
Shares held for six (6) months or less is
treated as long-term capital loss to the extent of any amounts treated as
distributions to the shareholder of long-term capital
gain (including any amounts credited to the shareholder as undistributed capital
gains).
The cost basis of
Fund Shares acquired by purchase will generally be based on the amount paid for
the Fund Shares and then may be
subsequently adjusted for other applicable transactions as required by the
Internal Revenue Code. The difference between
the selling price and the cost basis of Fund Shares generally determines the
amount of the capital gain or loss
realized on the sale or exchange of Fund Shares. Contact the broker through whom
you purchased your Fund Shares to obtain
information with respect to the available cost basis reporting methods and
elections for your account.
TAXATION
OF FUND INVESTMENTS
Dividends and
interest received by a Fund on foreign securities may give rise to withholding
and other taxes imposed by foreign countries.
Tax conventions between certain countries and the United States may reduce or
eliminate such taxes. No Fund expects to
satisfy the requirements for passing through to its shareholders any share of
any foreign taxes paid by the Fund, with the
result that shareholders will not include such taxes in their gross incomes and
will not be entitled to a tax deduction or
credit for such taxes on their own returns.
Certain of the
Funds' investments may be subject to complex provisions of the Internal Revenue
Code (including provisions relating
to hedging transactions, straddles, integrated transactions, foreign currency
contracts, forward foreign currency contracts,
and notional principal contracts) that, among other things, may affect the
character of gains and losses realized by a
Fund (e.g., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund
and defer losses. These rules could therefore affect the character, amount and
timing of distributions to shareholders.
These provisions also may require a Fund 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 Fund to recognize income without
receiving cash with which to make distributions
to its shareholders in amounts necessary to satisfy the RIC distribution
requirements for avoiding income and excise
taxes. The Funds intend to monitor their transactions, intend to make
appropriate tax elections, and intend to make
appropriate entries in their books and records in order to mitigate the effect
of these rules and preserve the Funds'
qualification for treatment as RICs.
Each Fund 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 Fund 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
Fund. It is anticipated that certain net gain
realized from the closing out of futures or options contracts will be considered
gain from the sale of securities and
therefore will be qualifying income for purposes of the Qualifying Income
Requirement.
For tax years
beginning after December 31, 2017 and before January 1, 2026, a non-corporate
taxpayer is generally eligible for a
deduction of up to 20% of the taxpayer's “qualified REIT
dividends.” If a Fund receives
a dividend (other than a capital gain
dividend) in respect of any share of U.S. REIT stock, the Fund may report its
own dividends as eligible for the 20% deduction,
to the extent the Fund's income is derived from such qualified REIT dividends,
as reduced by allocable Fund expenses. In
order for a Fund's dividends to be eligible for this deduction when received by
a non-corporate shareholder, the
Fund must meet certain holding period requirements with respect to the U.S. REIT
shares on which the Fund received the
eligible dividends, and the non-corporate shareholder must meet certain holding
period requirements with respect to the
Shares.
TAX-EXEMPT
SHAREHOLDERS
Certain tax-exempt
shareholders, including qualified pension plans, individual retirement accounts,
salary deferral arrangements, 401(k)
plans, 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, a Fund generally serves to block UBTI from being realized
by its tax-exempt shareholders. However, notwithstanding the foregoing,
tax-exempt shareholders could realize UBTI
by virtue of their investment in a Fund where, for example, (i) the Fund invests
in REITs that hold residual interests
in real estate mortgage investment conduits (“REMICs”) or (ii) Fund
Shares constitute debt-financed property in the
hands of the tax-exempt shareholders within the meaning of section 514(b) of the
Internal Revenue Code. Charitable remainder
trusts are subject to special rules and should consult their tax advisors. There
are no restrictions preventing a Fund
from holding investments in REITs that hold residual interests in REMICs, and a
Fund may do so. The IRS has issued
guidance with respect to these issues and prospective shareholders, especially
charitable remainder trusts, are strongly
encouraged to consult with their tax advisors regarding these
issues.
Certain tax-exempt
educational institutions will be subject to a 1.4% tax on net investment income.
For these purposes, certain dividends
and capital gain distributions, and certain gains from the disposition of Fund
Shares (among other categories of
income), are generally taken into account in computing a shareholder's net
investment income.
Dividends, other
than capital gains dividends, “short-term capital
gain dividends” and “interest-related
dividends”
(described below),
paid by a Fund to shareholders who are nonresident aliens or foreign entities
will be subject to a 30% United States
withholding tax unless a reduced rate of withholding or a withholding exemption
is provided under applicable treaty
law to the extent derived from investment income and short-term capital gain or
unless such income is effectively
connected with a U.S. trade or business carried on through a permanent
establishment in the United States. Nonresident
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax and
the proper withholding form(s) to be submitted to a Fund. A non-U.S. shareholder
who fails to provide an appropriate IRS
Form W-8 may be subject to backup withholding at the appropriate
rate.
Dividends reported
by a Fund as (i) interest-related dividends, to the extent such dividends are
derived from the Fund's “qualified net
interest income,” or (ii) short-term
capital gain dividends, to the extent such dividends are derived from the
Fund's
“qualified short-term
gain,” are generally
exempt from this 30% withholding tax. “Qualified net
interest income” is a Fund's net income
derived from U.S.-source interest and original issue discount, subject to
certain exceptions and limitations.
“Qualified short-term
gain” generally means the
excess of a Fund's net short-term capital gain for the taxable year over its net
long-term capital loss, if any. In the case of Fund Shares held through an
intermediary, the intermediary may withhold even if
a Fund reports the payment as an interest-related dividend or as a short-term
capital gain dividend. Non-U.S.
shareholders should contact their intermediaries with respect to the application
of these rules to their accounts.
Unless certain
non-U.S. entities that hold Fund Shares comply with IRS requirements that will
generally require them to report information
regarding U.S. persons investing in, or holding accounts with, such entities, a
30% withholding tax may apply to Fund
distributions payable to such entities. A non-U.S. shareholder may be exempt
from the withholding described in this paragraph
under an applicable intergovernmental agreement between the U.S. and a foreign
government, provided that the shareholder
and the applicable foreign government comply with the terms of such
agreement.
Non-U.S. persons are
subject to U.S. tax on disposition of a “United States real
property interest” (a “USRPI”). Gain on
such a
disposition is sometimes referred to as “FIRPTA
gain.” The Internal
Revenue Code provides a look-through rule for distributions of
“FIRPTA
gain” if certain
requirements are met. If the look-through rule applies, certain distributions
attributable to
income treated as received by a Fund from REITs may be treated as gain from the
disposition of a USRPI, causing
distributions to be subject to U.S. withholding taxes, and requiring non-U.S.
investors to file nonresident U.S. income tax returns.
Also, FIRPTA gain may be subject to a 30% branch profits tax in the hands of a
non-U.S. shareholder that is treated as a
corporation for federal income tax purposes. Under certain circumstances, Fund
Shares may qualify as USRPIs, which could
result in 15% withholding on certain distributions and gross redemption proceeds
paid to certain non-U.S.
investors.
A Fund will be
required in certain cases to withhold (as “backup
withholding”) on amounts payable
to any shareholder who (1) has provided the
Fund either an incorrect tax identification number or no number at all, (2) is
subject to backup withholding by the
IRS for failure to properly report payments of interest or dividends, (3) has
failed to certify to the Fund
that such
shareholder is not subject to backup withholding, or (4) has not certified that
such shareholder is a U.S. person (including a U.S.
resident alien). The backup withholding rate is currently 24%. Backup
withholding will not be applied to payments that have
been subject to the 30% withholding tax on shareholders who are neither citizens
nor permanent residents of the
U.S.
An Authorized
Participant who exchanges securities for Creation Units generally will recognize
a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the
time and the sum of the exchanger's
aggregate basis in the securities surrendered plus the amount of cash paid for
such Creation Units. A person who redeems Creation
Units will generally recognize a gain or loss equal to the difference between
the exchanger's basis in the Creation
Units and the sum of the aggregate market value of any securities received plus
the amount of any cash received for such
Creation Units. The IRS, however, may assert that a loss realized upon an
exchange of securities for Creation Units
cannot be deducted currently under the rules governing “wash
sales,” or on the basis
that there has been no significant
change in economic position.
Any gain or loss
realized upon a creation of Creation Units will be treated as capital gain or
loss if the Authorized Participant holds
the securities exchanged therefor as capital assets, and otherwise will be
ordinary income or loss. Similarly, any gain
or loss realized upon a redemption of Creation Units will be treated as capital
gain or loss if the Authorized
Participant holds the Fund Shares comprising the Creation Units as capital
assets, and otherwise will be ordinary income or
loss. Any capital gain or loss realized upon the creation of Creation Units will
generally be treated as long-term capital
gain or loss if the securities exchanged for such Creation Units have been held
for more than one year, and otherwise will
be short-term capital gain or loss. Any capital gain or loss realized upon the
redemption of Creation Units will generally
be treated as long-term capital gain or loss if the Fund Shares comprising the
Creation Units have been held for more
than one year, and otherwise, will generally be short-term capital gain or loss.
Any capital loss realized upon a redemption of
Creation Units held for six (6) months or less will be treated as a long-term
capital loss to the extent of any amounts
treated as distributions to the applicable Authorized Participant of long-term
capital gains with respect to the Creation Units
(including any amounts credited to the Authorized Participant as undistributed
capital gains).
A Fund has the right
to reject an order for Creation Units if the purchaser (or a group of
purchasers) would, upon obtaining the Fund
Shares so ordered, own 80% or more of the outstanding shares of the Fund and if,
pursuant to section 351 of the Internal
Revenue Code, the Fund would have a basis in any deposit securities different
from the market value of such securities
on the date of deposit. A Fund also has the right to require information
necessary to determine beneficial Fund
Share ownership for purposes of the 80% determination. If a Fund does issue
Creation Units to a purchaser (or a
group of purchasers) that would, upon obtaining the Fund Shares so ordered, own
80% or more of the outstanding shares
of the Fund, the purchaser (or a group of purchasers) may not recognize gain or
loss upon the exchange of
securities for Creation Units.
If a Fund redeems
Creation Units in cash, it may bear additional costs and recognize more capital
gains than it would if it redeems Creation
Units in-kind.
Persons purchasing
or redeeming Creation Units should consult their own tax advisors with respect
to the tax treatment of any creation or
redemption transaction.
CERTAIN
POTENTIAL TAX REPORTING REQUIREMENTS
Under promulgated
Treasury regulations, if a shareholder recognizes a loss on disposition of a
Fund's shares of $2 million or more for
an individual shareholder or $10 million or more for a corporate shareholder (or
certain greater amounts over a combination
of years), the shareholder must file with the IRS a disclosure statement on IRS
Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement,
but under current guidance,
shareholders of a RIC are not excepted. A shareholder who fails to make the
required disclosure to the IRS may be subject to
adverse tax consequences, including significant penalties. 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 advisers to determine the applicability of these regulations in light of
their individual circumstances.
The foregoing
discussion is a summary only and is not intended as a substitute for careful tax
planning. Purchasers of Fund Shares should
consult their own tax advisors as to the tax consequences of investing in such
Fund Shares, including under state, local
and other tax laws. Finally, the foregoing discussion is based on applicable
provisions of the Internal Revenue Code,
regulations, judicial authority and administrative interpretations in effect on
the date hereof. Changes in applicable authority
could materially affect the conclusions discussed above, and such changes often
occur.
Capital
Stock and Other Securities
Each Select Sector
SPDR Fund issues Shares of beneficial interest, par value $0.01 per Share. The
Board may designate additional Select
Sector SPDR Funds.
Each Share issued by
the Trust has a pro rata interest in the assets of the corresponding Select
Sector SPDR Fund. Shares have no
preemptive, exchange, subscription or conversion rights and are freely
transferable. Each Share is entitled to participate
equally in dividends and distributions declared by the Board with respect to the
relevant Select Sector SPDR Fund, and in the net
distributable assets of such Select Sector SPDR Fund on liquidation.
Each Share has one
vote with respect to matters upon which a shareholder vote is required
consistent with the requirements of the
1940 Act and the rules promulgated thereunder. Shares of all Select Sector SPDR
Funds vote together as a single
class, except that if the matter being voted on affects only a particular Select
Sector SPDR Fund, it will be voted on
only by that Select Sector SPDR Fund, and if a matter affects a particular
Select Sector SPDR Fund differently from
other Select Sector SPDR Funds, that Select Sector SPDR Fund will vote
separately on such matter. Under Massachusetts
law, the Trust is not required to hold an annual meeting of shareholders unless
required to do so under the 1940 Act.
The policy of the Trust is not to hold an annual meeting of shareholders unless
required to do so under the 1940 Act.
All Shares of the Trust (regardless of the Select Sector SPDR Fund) have
noncumulative voting rights for the election of
Trustees. Under Massachusetts law, Trustees of the Trust may be removed by vote
of the shareholders.
Under Massachusetts
law, shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for
obligations of the Trust. However, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts
or obligations of the Trust, requires that Trust obligations include such
disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust's property for any shareholder held
personally liable for the obligations of
the Trust. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
Given the above limitations on shareholder personal
liability, and the nature of each Fund's assets and operations, the risk to
shareholders of personal liability is
believed to be remote.
Shareholder
inquiries may be made by writing to the Trust, c/o the Distributor, ALPS
Portfolio Solutions Distributor, Inc., at 1290 Broadway, Suite
1000, Denver, Colorado 80203.
Counsel
and Independent Registered Public Accounting Firm
Morgan, Lewis &
Bockius LLP, located at 1111 Pennsylvania Avenue NW, Washington, DC 20004,
serves as counsel to the Trust. Cohen
& Company, Ltd., located at 1350 Euclid Ave., Suite 800, Cleveland, OH
44115, serves as the independent
registered public accounting firm of the Trust. Cohen & Company, Ltd.
performs annual audits of the Funds' financial statements
and provides other audit, tax and related services.
The financial
statements for the Funds and the independent registered public accounting firm
report thereon dated November 22, 2023,
which is contained in the Trust's Annual Report for the fiscal year ended
September 30, 2023 (as filed with the SEC
on December 6, 2023 pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1
thereunder), are incorporated herein
by reference.
Appendix
A
The
Select Sector SPDR®
Trust (the “Trust”)
PROXY
VOTING POLICY AND PROCEDURES
The Board of
Trustees of the Trust has adopted the following policy and procedures with
respect to voting proxies relating to portfolio
securities held by the Trust's investment portfolios.
The policy of the
Trust is to delegate the responsibility for voting proxies relating to portfolio
securities held by the Trust to SSgA Funds
Management, Inc., the Trust's investment adviser (the “Adviser”), subject to the
Trustees' continuing oversight.
The right to vote
proxies with respect to portfolio securities held by the Trust is an asset of
the Trust. The Adviser acts as a fiduciary of the
Trust and must vote proxies in a manner consistent with the best interest of the
Trust and its shareholders.
3.
Proxy
Voting Procedures
A.
At least annually,
the Adviser shall present to the Board its policies, procedures and other
guidelines for voting proxies
(“Policy”). (See attached
Schedule
A) In
addition, the Adviser shall notify the Trustees of material changes to its Policy
promptly and no later than at the next regular meeting of the Board of Trustees
after such amendment is
implemented.
B.
At least annually,
the Adviser shall present to the Board its policy for managing the conflicts of
interests that may arise through the
Adviser's proxy voting activities. In addition, the Adviser shall report any
Policy overrides involving portfolio
securities held by the Trust to the Trustees at the next regular meeting of the
Board of Trustees after such
override(s) occur.
C.
At least annually,
the Adviser shall inform the Trustees that a record is available with respect to
each proxy voted with respect to
portfolio securities of the Trust during the year. Also see Section 5
below.
4.
Revocation
of Authority to Vote
The delegation by
the Trustees of the authority to vote proxies relating to portfolio securities
of the Trust may be revoked by the Trustees, in
whole or in part, at any time.
5.
Annual
Filing of Proxy Voting Record
The Adviser shall
provide the required data for each proxy voted with respect to portfolio
securities of the Trust to the Trust or its designated
service provider in a timely manner and in a format acceptable to be filed in
the Trust's annual proxy voting report on
Form N-PX for the twelve-month period ended June 30. Form N-PX is required to be
filed not later than August 31 of each
year.
6.
Retention
and Oversight of Proxy Advisory Firms
A.
In considering
whether to retain or continue retaining a particular proxy advisory firm, the
Adviser will ascertain whether the proxy
advisory firm has the capacity and competency to adequately analyze proxy
issues, act as proxy voting agent
as requested, and implement the Policy. In this regard, the Adviser will
consider, at least annually, among
other things, the adequacy and quality of the proxy advisory firm's staffing and
personnel and the robustness of its
policies and procedures regarding its ability to identify and address any
conflicts of interest. The Adviser shall, at
least annually, report to the Board regarding the results of this
review.
B.
The Adviser will
request quarterly and annual reporting from any proxy advisory firm retained by
the Adviser, and hold ad hoc meetings
with such proxy advisory firm, in order to determine whether there has been any
business changes that might
impact the proxy advisory firm's capacity or competency to provide proxy voting
advice or services or changes
to the proxy advisory firm's conflicts policies or procedures. The Adviser will
also take reasonable steps to
investigate any material factual error, notified to the Adviser by the proxy
advisory firm or identified by the
Adviser, made by the proxy advisory firm in providing proxy voting
services.
The Adviser will
periodically sample proxy votes to review whether they complied with the Policy.
The Adviser shall, at least annually, report to
the Board regarding the frequency and results of the sampling
performed.
A.
The Trust shall
include in its registration statement:
1.
A description of
this policy and of the policies and procedures used by the Adviser to determine
how to vote proxies relating to
portfolio securities; and
2.
A statement
disclosing that information regarding how the Trust voted proxies relating to
portfolio securities during the most
recent twelve-month period ended June 30 is available without charge, upon
request, by calling the Trust's
toll-free telephone number; or through a specified Internet address; or both;
and on the Securities and
Exchange Commission's (the “SEC”)
website.
B.
The Trust shall
include in its annual and semi-annual reports to shareholders:
1.
A statement
disclosing that a description of the policies and procedures used by or on
behalf of the Trust to determine how to
vote proxies relating to portfolio securities of the Trust is available without
charge, upon request, by calling
the Trust's toll-free telephone number; through a specified Internet address, if
applicable; and on the SEC's
website; and
2.
A statement
disclosing that information regarding how the Trust voted proxies relating to
portfolio securities during the most
recent twelve-month period ended June 30 is available without charge, upon
request, by calling the Trust's
toll-free telephone number; or through a specified Internet address; or both;
and on the SEC's
website.
The Trustees shall
review this policy to determine its continued sufficiency as necessary from time
to time.
APPENDIX B – ADVISER’S PROXY VOTING
PROCEDURES AND GUIDELINES
March 2023
Global Proxy Voting and Engagement Principles
State Street Global Advisors, one of the industry’s largest
institutional asset managers, is the investment management arm of State Street
Corporation, a leading provider of financial services to institutional
investors. As an investment manager, State Street Global Advisors has
discretionary proxy voting authority over most of its client accounts, and State
Street Global Advisors votes these proxies in the manner that we believe will
most likely protect and promote the long-term economic value of client
investments, as described in this document.i
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These Global Proxy Voting and
Engagement Principles (the “Principles”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Principles; however, State Street Global Advisors also endeavors to show
sensitivity to local market practices when voting in these various
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| State
Street Global Advisors’ Authority and Duties to Vote Client and Fund
Securities |
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Where
State Street Global Advisors’ clients have asked it to vote their shares
on their behalf or where a commingled fund fiduciary has delegated the
responsibility to vote the fund’s securities to State Street Global
Advisors, State Street Global Advisors votes those client and fund-owned
securities in a unified manner, consistent with the Principles described
in this document. Exceptions to this unified voting policy are:
(1) where State Street Global Advisors has made proxy voting choices
(i.e., the proxy voting program) available to investors within a
commingled fund, in which case a pro rata portion of shares held by the
fund attributable to investors who choose to participate in the proxy
voting program would be voted consistent with the third-party proxy voting
policies selected by the investors, and (2) in the limited
circumstances where a pooled investment vehicle managed by State Street
Global Advisors utilizes a third party proxy voting guideline as set forth
in that fund’s organizational and/or offering documents. With respect to
such funds utilizing third-party proxy voting guidelines, the terms of the
applicable third-party proxy voting guidelines shall apply in place of the
Principles described herein and the proxy votes implemented with respect
to such a fund may differ from and be contrary to those votes implemented
for other portfolios managed by State Street Global Advisors pursuant to
its proprietary proxy voting guidelines. |
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| The Principles-State Street Global
Advisors’ Approach to Proxy Voting and Issuer Engagement |
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At State Street Global Advisors, we
take our fiduciary duties as an asset manager very seriously. We have a
dedicated team of corporate governance professionals who help us carry out
our duties as a responsible investor. These duties include engaging with
companies, developing and enhancing in-house corporate governance
guidelines, analyzing corporate governance issues on a case-by-case basis at the
company level, and exercising voting rights. The underlying goal is to
maximize shareholder value. |
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The Principles may take different
perspectives on common governance issues that vary from one market to
another. Similarly, engagement activity may take different forms in order
to best achieve long-term engagement goals. Rather than divesting from
portfolio companies, our approach is to engage with such companies. We
believe that proxy voting and engagement with portfolio companies is often
the most direct and productive way for shareholders to exercise their
ownership rights. This comprehensive toolkit is an integral part of the
overall investment process. |
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We believe engagement and voting
activity have a direct relationship. As a result, the integration of our
engagement activities, while leveraging the exercise of voting rights,
provides a meaningful shareholder tool that we believe protects and
enhances the long-term economic value of the holdings in our clients’
accounts. We maximize voting power and engagement by maintaining a
centralized proxy voting and active ownership process covering all
holdings, regardless of strategy. Despite the vast array of investment
strategies and objectives across State Street Global Advisors, the
fiduciary responsibilities of share ownership and voting for which State
Street Global Advisors has voting discretion are carried out with a single
voice and objective. |
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The Principles support governance
structures that we believe add to, or maximize, shareholder value for the
companies held in our clients’ portfolios. We conduct issuer-specific
engagements with companies to discuss our principles, including
sustainability-related risks and opportunities. In addition, we encourage
issuers to find ways to increase the amount of direct communication board
members have with shareholders. Direct communication with executive board
members and independent non-executive directors is critical to
helping companies understand shareholder concerns. |
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In conducting our engagements, we
also evaluate the various factors that influence the corporate governance
framework of a country, including the macroeconomic conditions and broader
political system, the quality of regulatory oversight, the enforcement of
property and shareholder rights, and the independence of the judiciary. We
understand that regulatory requirements and investor expectations relating
to governance practices and engagement activities differ from country to
country. As a result, we engage with issuers, regulators, or a combination
of the two depending upon the market. We are also a member of various
investor associations that seek to address broader corporate
governance-related policy at the country level. |
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The State Street Global Advisors Asset
Stewardship Team may consult with members of various investment teams to
engage with companies on corporate governance issues and to address any
specific concerns. This facilitates our comprehensive approach to
information gathering as it relates to items that are to be voted upon at
upcoming shareholder meetings. We also conduct issuer-specific engagements
with companies, covering various corporate governance and
sustainability-related topics outside of proxy season. |
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The Asset
Stewardship Team employs a blend of quantitative and qualitative research,
analysis and data in order to support screens that identify issuers where
active engagement may be necessary to protect and promote shareholder
value. Issuer engagement may also be event-driven, focusing on
issuer-specific corporate governance or sustainability concerns, or
broader industry-related trends. We also consider the size of our total
position in the issuer in question and/or the potential negative
governance, performance profile, and circumstance at hand. As a result, we
believe issuer engagement can take many forms and be triggered by numerous
circumstances. The following approaches represent how we define engagement
methods: |
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We use screening tools designed to
capture a mix of company-specific data, including governance and
sustainability profiles, to inform our voting and engagement
activity. |
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We will
actively seek direct dialogue with the board and management of companies
that we have identified through our screening processes. Such engagements
may lead to further monitoring to ensure that the company improves its
governance or sustainability practices. In these cases, the engagement
process represents the most meaningful opportunity for us to protect
long-term shareholder value from excessive risk due to poor governance and
sustainability practices. |
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| Reactive |
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Reactive engagement is initiated by
issuers. We routinely discuss specific voting issues and items with the
issuer community. Reactive engagement is an opportunity to address not
only voting items, but also a wide range of governance and sustainability
issues. |
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We have
established an engagement protocol that further describes our approach to
issuer engagement. |
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| Measurement |
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Our stewardship activities are
designed to have an impact on company-specific and market-level disclosure
and oversight practices that we believe protect and promote shareholder
value. |
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Company-specific successes
Assessing the effectiveness of our company-specific engagement process
can be challenging to measure. To limit subjectivity in measuring our
success, we actively seek issuer feedback and monitor the actions taken by
issuers post-engagement in order to identify tangible changes. This
enables us to establish indicators to gauge how issuers respond to our
concerns and to what degree these responses satisfy our requests. It is
also important to note that successful engagement activity can be measured
over multiple years depending on the facts and circumstances involved.
These engagements not only inform our voting decisions but also allow us
to monitor improvement over time and to contribute to our evolving
perspectives on priority areas. We also track the impact of our proxy
votes by reviewing changing trends in market practices on specific
corporate-governance or sustainability-related issues that we address
through voting action. We report engagement and voting actions to clients
on an annual basis. |
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Market-level successes We track the broader adoption
of our stewardship priorities — Effective Board Oversight, Climate Risk
Management, Human Capital Management, and Diversity, Equity, and Inclusion
- which we consider core to creating long-term value, by assessing the
number of market participants that have embraced positions consistent with
our thought leadership and advocacy. |
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| Proxy Voting Procedure |
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Oversight |
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The Asset Stewardship Team is responsible for developing and
implementing State Street Global Advisors’ Global Proxy Voting and
Engagement Principles, Global Proxy Voting and Engagement Guidelines for
Environmental and Social Factors, regional proxy voting and engagement
guidelines, and guidance published thereunder by State Street Global
Advisors from time to time, available at ssga.com/about-us/asset-stewardship.html
(collectively, the “Voting Policy”), the implementation of third-party
proxy voting guidelines where applicable, case-by-case voting items,
issuer engagement activities, and research and analysis of
governance-related issues. The Asset Stewardship Team’s activities are
overseen by our internal governance body, State Street Global Advisors’
ESG Committee (the “ESG Committee”). The ESG Committee is responsible for
reviewing State Street Global Advisors’ stewardship strategy, engagement
priorities, and proxy voting guidelines, and for monitoring the delivery
of voting objectives. |
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| Proxy Voting Process |
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In order to facilitate our proxy
voting process, we retain Institutional Shareholder Services Inc. (“ISS”),
a firm with expertise in proxy voting and corporate governance. We utilize
ISS to: (1) act as our proxy voting agent (providing State Street
Global Advisors with vote execution and administration services), (2)
assist in applying the Voting Policy, (3) provide research and
analysis relating to general corporate governance issues and specific
proxy items, and (4) provide proxy voting guidelines in limited
circumstances. |
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All voting decisions and engagement
activities are undertaken in accordance with our in-house Voting Policy, ensuring that
the interests of our clients remain the sole consideration when
discharging our stewardship responsibilities. Exceptions to this policy is
the use of an independent third party to vote on State Street stock and
other State Street Global Advisors affiliated entities, to mitigate a
conflict of interest of voting on our parent company or affiliated
entities, and other situations where we retain an independent fiduciary to
make a voting decision where we believe we may be conflicted from voting
(for example, due to an outside business interest). In such cases,
delegated third parties exercise vote decisions based upon State Street
Global Advisors’ Proxy Voting and Engagement Guidelines. |
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We aim to vote at all shareholder
meetings where our clients have given us the authority to vote their
shares and where it is feasible to do so. However, when we deem
appropriate, we could refrain from voting at meetings in cases
where: |
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• Power of attorney documentation is
required. |
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• Voting will have a material impact on our ability to
trade the security. |
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• Voting is not permissible due to sanctions affecting a
company or individual. |
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• Issuer-specific special documentation is required or
various market or issuer certifications are required. |
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• Unless a client directs otherwise, State Street Global
Advisors will not vote proxies in so-called “share blocking” markets
(markets where proxy voters have their securities blocked from trading
during the period of the annual meeting). |
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Additionally, we are unable to vote
proxies when certain custodians, used by our clients, do not offer proxy
voting in a jurisdiction or when they charge a meeting-specific fee in
excess of the typical custody service agreement. |
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In rare
circumstances where nuances within specific resolutions fall outside of
the scope of existing voting guidelines, requiring case-by-case analysis, such
resolutions are escalated to the head of Asset Stewardship and reported to
the ESG Committee. Additionally, in certain cases, where a material
conflict of interest is identified, the matter may be referred to the ESG
Committee for review. |
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| Conflict
of Interest |
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See our
standalone Conflicts Mitigation Guidelines. |
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| Proxy
Voting and Engagement Principles |
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| Directors and Boards |
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The election of directors is one of
the most important fiduciary duties we perform on behalf of our clients.
We believe that well-governed companies can protect and pursue shareholder
interests better and withstand the challenges of an uncertain economic
environment. As such, we seek to vote director elections in a way that we
believe will maximize long-term value. |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
This concept establishes the standard by which board and director
performance is measured. In order to achieve this fundamental principle,
the role of the board is to carry out its responsibilities in the best
long-term interest of the company and its shareholders. An independent and
effective board sets the strategy and provides guidance on strategic
matters, oversees management, selects the CEO and other senior executives,
creates a succession plan for the board and management, provides risk
oversight, and assesses the performance of the CEO and management. In
contrast, management implements the business and capital allocation
strategies and runs the company’s day-to-day operations. As part
of our engagement process, we routinely discuss the importance of these
responsibilities with the boards of issuers. |
B-6
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We
believe the quality of a board is a measure of director independence,
director succession planning, board diversity, evaluations and
refreshment, and company governance practices. In voting to elect
nominees, we consider many factors. We believe independent directors are
crucial to good corporate governance; they help management establish sound
corporate governance policies and practices. A sufficiently independent
board will effectively monitor management, maintain appropriate governance
practices, and perform oversight functions necessary to protect
shareholder interests. We also believe the right mix of skills,
independence, diversity, and qualifications among directors provides
boards with the knowledge and direct experience to manage risks and
operating structures that are often complex and
industry-specific. |
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| Accounting and Audit- Related
Issues |
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We believe audit committees are
critical and necessary as part of the board’s risk oversight role. The
audit committee is responsible for setting out an internal audit function
that provides robust audit and internal control systems designed to
effectively manage potential and emerging risks to the company’s
operations and strategy. We believe audit committees should have
independent directors as members, and we will hold the members of the
audit committee responsible for overseeing the management of the audit
function. |
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We
believe the disclosure and availability of reliable financial statements
in a timely manner is imperative for the investment process. As a result,
board oversight of the internal controls and the independence of the audit
process are essential if investors are to rely upon financial statements.
It is important for the audit committee to appoint external auditors who
are independent from management as we expect auditors to provide assurance
of a company’s financial condition. |
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| Capital Structure, Reorganization and
Mergers |
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The ability to raise capital is
critical for companies to carry out strategy, to grow, and to achieve
returns above their cost of capital. The approval of capital raising
activities is fundamental to a shareholder’s ability to monitor the
amounts of proceeds and to ensure capital is deployed efficiently.
Altering the capital structure of a company is a critical decision for
boards. When making such a decision, we believe the company should
disclose a comprehensive business rationale that is consistent with
corporate strategy and not overly dilutive to its
shareholders. |
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Mergers or reorganization of the
structure of a company often involve proposals relating to
reincorporation, restructurings, liquidations, and other major changes to
the corporation. |
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Proposals that are in the best
interests of shareholders, demonstrated by enhancing share value or
improving the effectiveness of the company’s operations, will be
supported. In evaluating mergers and acquisitions, we consider the impact
of the corporate governance provisions to shareholders. In all cases, we
use our discretion in order to maximize shareholder
value. |
B-7
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Occasionally, companies add anti-takeover provisions that
reduce the chances of a potential acquirer to make an offer, or to reduce
the likelihood of a successful offer. We do not support proposals that
reduce shareholders’ rights, entrench management, or reduce the likelihood
of shareholders’ right to vote on reasonable offers. |
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| Compensation |
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We consider it the board’s
responsibility to identify the appropriate level of executive
compensation. Despite the differences among the types of plans and the
awards possible, there is a simple underlying philosophy that guides our
analysis of executive compensation: we believe that there should be a
direct relationship between executive compensation and company performance
over the long term. |
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Shareholders should have the
opportunity to assess whether pay structures and levels are aligned with
business performance. When assessing remuneration reports, we consider
factors such as adequate disclosure of various remuneration elements,
absolute and relative pay levels, peer selection and benchmarking, the mix
of long-term and short-term incentives, alignment of pay structures with
shareholder interests, as well as with corporate strategy and performance.
We may oppose remuneration reports where pay seems misaligned with
shareholders’ interests. We may also consider executive compensation
practices when re-electing
members of the remuneration committee. |
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We
recognize that compensation policies and practices are unique from market
to market; often there are significant differences between the level of
disclosures, the amount and forms of compensation paid, and the ability of
shareholders to approve executive compensation practices. As a result, our
ability to assess the appropriateness of executive compensation is often
dependent on market practices and laws. |
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| Environmental and Social
Issues |
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As a fiduciary, State Street Global
Advisors takes a comprehensive approach to engaging with our portfolio
companies about material environmental and social issues. Our Asset
Stewardship program prioritization process allows us to proactively
identify companies for engagement and voting in order to mitigate
sustainability risks in our portfolio. Through engagement, we aim to build
long-term relationships with the issuers in which we invest on behalf of
our clients and to address a broad range of topics relating to the
promotion of long-term shareholder value creation. When voting, we
fundamentally consider whether the adoption of a shareholder proposal
addressing a material environmental or social topic would promote
long-term shareholder value in the context of the company’s existing
practices and disclosures as well as existing market
practice. |
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For more information on our approach to environmental and
social topics, please see our Global Proxy Voting and Engagement
Guidelines for Environmental and Social Factors, available at
ssga.com/about-us/asset-stewardship.html. |
B-8
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| General/Routine |
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Although we do not seek involvement in the day-to-day operations of an
organization, we recognize the need for conscientious oversight and input
into management decisions that may affect a company’s value. We support
proposals that encourage economically advantageous corporate practices and
governance, while leaving decisions that are deemed to be routine or
constitute ordinary business to management and the board of
directors. |
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| Fixed Income Stewardship |
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The two elements of our fixed income
stewardship program are: |
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Proxy Voting: |
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While matters that arise for a vote
at bondholder meetings vary by jurisdiction, examples of common proxy
voting resolutions at bondholder meetings include: |
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• Approving amendments to debt covenants and/or terms of
issuance |
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• Authorizing procedural matters, such as filing of
required documents/other formalities |
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• Approving debt restructuring plans |
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• Abstaining from challenging the bankruptcy
trustees |
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• Authorizing repurchase of issued debt
security |
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• Approving the placement of unissued debt securities under
the control of directors |
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• Approving spin-off/absorption
proposals |
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Given the nature of the items that
arise for vote at bondholder meetings, we take a case-by-case approach to voting
bondholder resolutions. Where necessary, we will engage with issuers on
voting matters prior to arriving at voting decisions. All voting decisions
will be made in the best interest of our clients. |
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Issuer
Engagement: |
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We
recognize that debt holders have limited leverage with companies on a
day-to-day basis. Our guidelines
for engagement with fixed income issuers broadly follow the engagement
guidelines for our equity holdings, as described above. |
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| Securities on Loan |
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As a responsible investor and
fiduciary, we recognize the importance of balancing the benefits of voting
shares and the incremental lending revenue for the pooled funds that
participate in State Street Global Advisors’ securities lending program
(the “Funds”). Our objective is to recall securities on loan and restrict
future lending until after the record date for the respective vote in
instances where we believe that a particular vote could have a material
impact on the Funds’ long-term financial performance and the benefit of
voting shares will outweigh the forgone lending
income. |
B-9
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Accordingly, we have set systematic
recall and lending restriction criteria for shareholder meetings involving
situations with the highest potential financial implications (such as
proxy contests and strategic transactions including mergers and
acquisitions, going dark transactions, change of corporate form,
bankruptcy and liquidation). |
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Generally, these criteria for recall
and restriction for lending only apply to certain large cap indices in
developed markets. |
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State Street Global Advisors
monitors the forgone lending revenue associated with each recall to
determine if the impact on the Funds’ long-term financial performance and
the benefit of voting shares will outweigh the forgone lending
income. |
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Although our objective is to systematically recall
securities based on the aforementioned criteria, we must receive notice of
the vote in sufficient time to recall the shares on or before the record
date. In cases in which we do not receive timely notice, we may be unable
to recall the shares on or before the record date. |
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| Reporting |
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We
provide transparency for our stewardship activities through our regular
client reports and relevant information reported online. We publish an
annual stewardship report that provides details of our stewardship
approach, engagement and voting policies, and activities during the year.
The annual report is complemented by quarterly stewardship activity
reports as well as the regular publication of thought leadership on
governance and sustainability on our website. Our voting record
information is available on Vote View, an interactive platform that
provides relevant company details, proposal types, resolution
descriptions, and records of our votes cast. |
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| About
State Street Global Advisors |
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For four decades, State Street Global
Advisors has served the world’s governments, institutions and financial
advisors. With a rigorous, risk-aware approach built on research, analysis
and market-tested experience, we build from a breadth of index and active
strategies to create cost-effective solutions. And, as pioneers in index,
ETF, and ESG investing, we are always inventing new ways to invest. As a
result, we have become the world’s fourth-largest asset manager* with US
$3.62 trillion† under our
care. |
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* Pensions & Investments
Research Center, as of December 31, 2021. |
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† This figure is presented as of March 31,
2023 and includes approximately $65.03 billion USD of assets with
respect to SPDR products for which State Street Global Advisors Funds
Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD
and State Street Global Advisors are affiliated. Please note all AUM is
unaudited. |
B-10
ssga.com
Marketing communications
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T:
+971 2 245 9000. Australia: State Street Global Advisors,
Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial
Services License (AFSL Number 238276). Registered office: Level 14, 420
George Street, Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612
9240-7611. Belgium: State Street Global Advisors Belgium, Chaussée de La
Hulpe 185, 1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global
Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s
Quay, Dublin 2. Canada: State Street Global Advisors, Ltd.,
1981 McGill College
Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30
Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France.
T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State
Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59,
D-80333 Munich, Germany (“State Street
Global Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors
Germany is a branch of State Street Global Advisors Europe Limited, registered
in Ireland with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia
Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong. T: +852 2103-0288. F: +852 2103-0200.
Ireland: State Street Global Advisors Europe Limited is
regulated by the Central Bank of Ireland. Registered office address 78 Sir John
Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000.
F: +353 (0)1 776 3300. Italy: State Street Global Advisors Europe
Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors Italy is registered in Italy with company number 11871450968 —
REA: 2628603 and VAT number 11871450968, and its office is located at Via
Ferrante Aporti, 10 - 20125 Milan, Italy. T: +39 02 32066 100. F: +39
02 32066 155. Japan: State Street Global Advisors (Japan)
Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan,
Japan Securities Dealers’ Association. Netherlands: State
Street Global Advisors Netherlands, Apollo Building 7th floor,
Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181
000. State Street Global Advisors Netherlands is a branch office of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State
Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No.
5776591 81. Registered office: 20 Churchill Place, Canary Wharf,
London, E14 5HJ. T: 020 3395 6000. F: 020 3395
6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
B-11
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the
current accuracy, reliability or completeness of, nor liability for, decisions
based on such information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies.
A portfolio’s ESG criteria may result in the portfolio investing
in industry sectors or securities which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring
model is based on sustainability and corporate governance
dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1551551-3479888.7.2.GBL.RTL 0423 Exp. Date: 03/31/2024
B-12
April 2023
Global Proxy Voting and Engagement Guidelines for Environmental
and Social Factors
Information Classification: Limited Access
B-13
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| Overview |
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Our primary fiduciary obligation to
our clients is to maximize the long-term returns of their investments. It
is our view that material sustainability considerations, including
material environmental and social (E&S) issues, can present material
risks and/or opportunities that impact long-term value creation. This
philosophy provides the foundation for our value-based approach to Asset
Stewardship. |
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We regularly identify stewardship
priorities that we believe are important for our portfolio companies to
consider. |
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| Our Approach to Assessing E&S
Factors |
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While we believe that E&S factors can expose companies
to material risks as well as drive long-term value creation, the
materiality of specific E&S factors varies across industries, markets,
and specific companies. We leverage several inputs to inform our views on
an E&S issue at a given company, including:
• Established frameworks, including The Sustainability
Accounting Standards Board’s (SASB) Standards, the Task Force on
Climate-related Financial Disclosures (TCFD) Framework, etc.
• Academic research and other expert insights
• Disclosure expectations required by regulation
• Market expectations for the sector and
industry
We expect companies to disclose information regarding their
approach to identifying and managing E&S-related risks and opportunities
they have deemed to be material, as well as the board’s oversight of these
risks and opportunities. |
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| Our Approach to E&S Factors
Through Engagements |
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The Asset Stewardship team regularly
identifies thematic stewardship priorities that will be addressed across
different engagement meetings. We focus on priorities that we consider
important to be considered by the portfolio companies in which we invest
our clients’ assets. These engagements help us to establish disclosure
expectations and to more fully understand the nuanced challenges that
companies seek to address related to E&S factors. Establishing robust
disclosure expectations allows us to monitor companies’ progress toward
alignment with our relevant disclosure expectations, and contributes to
our perspectives on our stewardship priority areas. |
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Through engagement, we address a
broad range of factors that align with our stewardship priorities and seek
to foster constructive, long-term relationships with issuers. We view
engagements as part of an ongoing dialogue, versus a series of one-off
conversations. During conversations with issuers, we share expectations
and perspectives on key dimensions of E&S factors, and seek to
understand how companies and their boards manage and oversee related risks
and opportunities. |
Information Classification: Limited Access
B-14
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The Use of R-Factor in
Engagements |
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R-Factor™ is a scoring system
created by State Street Global Advisors that measures the performance of a
company’s business operations and governance as it relates to material ESG
factors facing the company’s industry. SSGA uses R-Factor as a consideration when
prioritizing engagements. State Street Global Advisors may also engage
with a company regarding its R-Factor™ score at the request
of the company. |
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| Analyzing E&S Proposals |
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When analyzing shareholder proposals related to E&S
factors, we consider the following factors:
• The materiality of the E&S factors in the proposal to
the company’s business and sector (see “Our Approach to Assessing
Materiality and Relevance of E&S Factors” above)
• The content and intent of the proposal, including whether
the adoption of such a proposal would provide information to allow
investors to better understand risk and opportunities in the context of
the company’s disclosure and practices
• The strength of board oversight of the company’s relevant
sustainability practices, as well as responsiveness to
engagement
• Binding nature or prescriptiveness of proposal
For proposal topics for which we have developed guidance, we
leverage the specific guidance, found in the Appendix, as a benchmark to
analyze a company’s disclosures relative to our expectations for the
relevant E&S factor.
For proposal topics for which we have not published
guidance, we evaluate the company’s determination of materiality of the
proposal to the company’s business and operations and the company’s
related disclosures and oversight. |
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| Voting on E&S
Proposals |
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Below is the approach we follow when voting on E&S
proposals:
• FOR We will consider voting for proposals that we believe
will lead to increased alignment with our expectations, including those
set out in the attached Appendix;
• ABSTAIN We will consider voting abstain when we support
some elements of a proposal’s request, or recognize a company’s commitment
to implement related disclosure and/or oversight practices;
• AGAINST We will consider voting against proposals that we
believe are immaterial, overly prescriptive, or would not further our
disclosure and oversight expectations, including those set out in the
Appendix. |
Information Classification: Limited Access
B-15
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| Appendix |
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Guidance on Common Environmental and Social Proposal
Topics
The following provides an overview of State Street Global
Advisors’ public guidance related to common environmental and social
shareholder proposal topics. We leverage this to inform our analysis of
relevant shareholder proposals as it applies to companies in our
portfolios.
Climate Change
We expect all companies to provide public disclosures in
accordance with the following four pillars of the Taskforce for
Climate-related Financial Disclosures (TCFD) framework:
1. Governance;
2. Strategy;
3. Risk Management; and
4. Metrics and Targets. |
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Additionally, we expect companies in
carbon-intensive sectors to disclose: |
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Interim greenhouse gas emissions
reduction targets to accompany long-term climate ambitions |
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Discussion of impacts of
scenario-planning on strategy and financial planning Incorporation of
climate considerations in capital allocation decisions |
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Scope 1, 2, and material categories
of Scope 3 greenhouse gas emissions |
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For additional context on our
expectations for relevant disclosures, please review our related
guidance. |
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Diversity, Equity, and
Inclusion |
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We expect all companies to provide
public disclosure in the following key areas: |
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1. Board Oversight — Describe how the board executes its
oversight role in risks and opportunities related to diversity and
inclusion;
2. Strategy — Articulate the role diversity (of race,
ethnicity, and gender, at minimum) plays in the company’s broader human
capital management practices and long-term strategy;
3. Goals — Describe what diversity, equity, and
inclusion-related goals exist, how these goals contribute to the company’s
overall strategy, and how they are managed and
progressing; |
Information Classification: Limited Access
B-16
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4. Metrics — Provide measures of the diversity of the
company’s global employee base and board, including: |
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- Workforce — Employee diversity by race, ethnicity, and
gender (at minimum). We expect to see this information to be broken down
by industry-relevant employment categories or levels of seniority, for all
full-time employees. In the US, companies are expected to at least use the
disclosure framework set forth by the United States Equal Employment
Opportunity Commission’s EEO-1
Survey. Non-US companies are
encouraged to disclose this information in alignment with SASB guidance
and nationally appropriate frameworks; and, |
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- Board — Diversity characteristics, including racial,
ethnic, and gender makeup (at minimum) of the board of directors;
and |
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5. Board Diversity — Articulate goals and strategy related
to diverse representation at the board (including race, ethnicity, and
gender, at minimum), including how the board reflects the diversity of the
company’s workforce, community, customers, and other key
stakeholders. |
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For additional context on our expectations for relevant
disclosures, please review our related guidance. |
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Civil Rights
Risks |
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We expect all companies in the US to
provide public disclosure on: |
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1. Risks related to civil rights, including risks
associated with products, practices, and services ;
2. Plans to manage and mitigate these risks; and
3. Processes at the board for overseeing such risks (e.g.,
committee responsible, frequency of discussions, etc.). |
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For additional context on our
expectations for relevant disclosures, please review our related
guidance. |
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Pay Equity |
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We expect all companies in the US and the UK to provide
public disclosure on:
1. Adjusted pay gaps related to race and gender within the
company (Disclosure of the unadjusted pay gap is also encouraged, but not
expected outside of the UK market at this time);
2. Strategy to achieve and maintain pay equity;
and
3. Role of the board in overseeing pay strategies as well
as Diversity, Equity and Inclusion efforts. |
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For additional context on our
expectations for relevant disclosures, please review our related
guidance. |
Information Classification: Limited Access
B-17
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Human Rights |
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We expect companies to disclose whether they have
established processes for identifying risks related to human rights. If
any material human rights risks are identified, we expect further public
disclosure describing:
1. Human rights-related risks the company considers most
material;
2. Plans to manage and mitigate these risks;
3. Board oversight of these risks; and
4. Assessment of the effectiveness of the human rights risk
management program. |
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For additional context on our
expectations for relevant disclosures, please review our related
guidance. |
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Human Capital
Management |
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We expect all companies to provide
public disclosure on: |
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1. Board oversight — Methods outlining how the board
oversees human capital-related risks and opportunities;
2. Strategy — Approaches to human capital management and
how these advance the long-term business strategy;
3. Compensation — Strategies throughout the organization
that aim to attract and retain employees, and incentivize contribution to
an effective human capital strategy;
4. Voice — Channels to ensure the concerns and ideas from
workers are solicited and acted upon, and how the workforce is engaged and
empowered in the organization; and
5. Diversity, equity, and inclusion — Efforts to advance
diversity, equity, and inclusion (see our complementary Guidance on
Diversity Disclosures & Practices for additional
context). |
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For additional context on our
expectations for relevant disclosures, please review our related
guidance. |
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Environmental
Impacts |
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If material risks related to adverse environmental impacts
from company operations have been identified, we expect companies to
disclose information related to:
1. Adverse environmental impacts the company considers most
material, including relevant demographic data where applicable;
2. Management of material risks from company operations,
including the role of stakeholders; and
3. Board oversight of such
risks. |
Information Classification: Limited Access
B-18
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Deforestation-Intensive
Companies |
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We expect companies that have determined deforestation is a
material risk to their business and operations to disclose:
1. Strategy to assess and manage deforestation-related
risks and opportunities for high-risk commodities in the company’s
operations and/or business value chain (e.g., supply chain monitoring and
engagement, greenhouse gas emissions linked to deforestation, product
certifications, stakeholder engagement);
2. Quantitative and/or qualitative metrics and time-bound
targets used to assess and manage risks and opportunities related to high
deforestation-risk commodities in the company’s operations and/or business
value chain; and
3. Board oversight and accountability for deforestation
and/or land use-related
risks. |
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For
additional context on our expectations for relevant disclosures and
leading practices, please review our related insights gained from
engaging with our portfolio companies in deforestation-intensive
sectors. |
| |
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| About
State Street Global Advisors |
|
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|
For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. And, as pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth-largest asset manager* with US $3.62
trillion† under our
care. |
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* Pensions & Investments
Research Center, as of December 31, 2021. |
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† This figure is
presented as of March 31, 2023 and includes approximately
$65.03 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is unaudited. |
Information Classification: Limited Access
B-19
ssga.com
State Street Global Advisors
Marketing Communication
Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir
John Rogerson’s Quay, Dublin 2. Canada: State Street Global
Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T:
+514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6.
T: +647 775 5900. France: State Street Global Advisors Europe Limited,
France Branch (“State Street Global Advisors France”) is a branch of State
Street Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street
Global Advisors Asia Limited, 68/F, Two International Finance
Centre, 8 Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852
2103-0200. Ireland: State Street Global Advisors Europe Limited is
regulated by the Central Bank of Ireland. Registered office address 78 Sir John
Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F:
+353 (0)1 776 3300. Italy: State Street Global Advisors Europe Limited,
Italy Branch (“State Street Global Advisors Italy”) is a branch of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
Italy is registered in Italy with company number 11871450968 — REA: 2628603 and
VAT number 11871450968, and its office is located at Via Ferrante Aporti, 10
-20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan:
State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F
1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors
Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. South Africa: State Street Global Advisors Limited
is regulated by the Financial Sector Conduct Authority in South Africa
under license number 42670. United Kingdom: State Street Global
Advisors Limited. Authorised and regulated by the Financial Conduct Authority.
Registered in England. Registered No. 2509928. VAT No. 5776591 81.
Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020
3395 6000. F: 020 3395 6350. United States: State Street Global Advisors,
1 Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
Information Classification: Limited Access
B-20
Important Risk Information
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without State
Street Global Advisors’ express The views expressed in this material are the
views of SSGA Asset Stewardship Team through the period ended May 26, 2023
and are subject to change based on market and other conditions. This document
contains certain statements that may be deemed forward-looking statements.
Please note that any such statements are not guarantees of any future
performance and actual results or developments may differ materially from those
projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing
in industry sectors or securities which underperform the market as
a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not
represent investment performance. Results generated out of the
scoring model is based on sustainability and corporate governance dimensions of
a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1533400-3479887.5.1.GBL.RTL 0423
Exp. Date: 06/30/2024
Information Classification: Limited Access
B-21
March 2023
Conflicts Mitigation Guidelines Managing Conflicts of Interest
Arising from State Street Global Advisors’ Proxy Voting and Engagement Activity
State Street Corporation has a comprehensive standalone Conflicts
of Interest Policy and other policies that address a range of identified
conflicts of interests. In addition, State Street Global Advisors, the asset
management business of State Street Corporation, maintains a conflicts register
that identifies key conflicts and describes systems in place to mitigate the
conflicts. This document* is designed to act in conjunction with related
policies and practices employed by other groups within the organization.
Further, it complements those policies and practices
B-22
by providing information about managing the conflicts of interests
that may arise through State Street Global Advisors’ proxy voting and engagement
activities.
| |
* |
These Managing Conflicts of Interest
Arising From State Street Global Advisors’ Proxy Voting and Engagement
Activity Guidelines are also applicable to SSGA Funds Management, Inc.
SSGA Funds Management, Inc. is an SEC-registered investment adviser. SSGA
Funds Management, Inc., State Street Global Advisors Trust Company, and
other advisory affiliates of State Street make up State Street Global
Advisors, the investment management arm of State Street Corporation.
|
B-23
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Managing Conflicts
of Interest Related to Proxy Voting and
Engagement |
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State Street Global Advisors has implemented processes
designed to prevent undue influence on State Street Global Advisors’
voting and engagement activities that may arise from relationships between
proxy issuers or companies and State Street Corporation, State Street
Global Advisors,
State Street Global Advisors affiliates, State Street Global
Advisors Funds, or State Street Global Advisors Fund affiliates. State
Street Global Advisors assigns sole responsibility for the implementation
of proxy voting guidelines to members of its Asset Stewardship Team, a
team that is independent from other functions within the organization,
such as sales and marketing, investment, or client facing teams. Proxy
voting is undertaken in accordance with the Global Proxy Voting and
Engagement Principles, Global Proxy Voting and Engagement Guidelines for
Environmental and Social Factors, regional proxy voting and engagement
guidelines and guidance published thereunder by State Street Global
Advisors from time to time (the “Voting Policy”), which are reviewed and
overseen by the State Street Global Advisors’ ESG Committee (the “ESG
Committee”). Any changes to the Voting Policy are communicated to Asset
Stewardship Team employees in a timely manner to ensure that they
understand the potential impact to their proxy voting activities. In rare
circumstances where nuances within specific proxy proposals fall outside
of the scope of the Voting Policy, requiring case-by-case analysis, such
proposals are escalated to the head of Asset Stewardship and reported to
the ESG Committee. Voting consistently with the Voting Policy helps
mitigate potential conflicts of interest, as the Voting Policy is
determined without reference to any specific entities or
relationship.
Members of the Asset Stewardship Team may from time to time
discuss views on proxy voting matters, company performance, strategy, etc.
with other State Street Corporation or State Street Global Advisors
employees, including portfolio managers, senior executives, and
relationship managers. However, final voting decisions are made solely by
the Asset Stewardship Team, in accordance with the Voting Policy and in a
manner consistent with the best interest of its clients, taking into
account various perspectives on risks and opportunities with the goal of
maximizing the value of client assets. Except in certain jurisdictions
where proxy voting decisions are regularly disclosed prior to voting
pursuant to local custom, Asset Stewardship Team employees are generally
prohibited from disclosing State Street Global Advisors’ voting decisions
prior to the meetings. In addition, State Street Global Advisors generally
exercises a single voting decision for each ballot item across the client
accounts for which it is responsible for proxy voting regardless of
investment strategy.1 In certain cases,
where a material conflict of interest is identified, the matter may be
referred to the ESG Committee for review.
Other protocols designed to help mitigate potential
conflicts of interest include: |
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1 Exceptions to this unified voting policy are where:
(1) State Street Global Advisors has made proxy voting choices (i.e.,
the State Street Global Advisors proxy voting program) available to
investors within a pooled investment vehicle, in which case a pro rata
portion of shares held by the fund attributable to investors who choose to
participate in the proxy voting program would be voted consistent with the
third-party proxy voting policies selected by the investors, and
(2) in limited circumstances, certain pooled investment vehicles for
which State Street Global Advisors acts as investment manager may,
pursuant to their governing documents, utilize proxy voting guidelines
developed by third-party advisors. |
B-24
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Types of Potential Conflict
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Stewardship Conflict of Interest
Description
|
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Typical Conflict Mitigation Protocols That
We
Employ
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| Business relationships |
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A conflict of interest may arise where, for example, we hold
investments in companies with which we, or our affiliates, have material
business relationships. |
|
Assigning sole responsibility for the implementation of
proxy voting guidelines to members of Asset Stewardship Team and voting in
accordance with the Voting Policy are our primary conflict mitigation
protocols. Furthermore, the voting rationale is recorded to provide
transparency.
Additional mitigation steps may be implemented on a case-by-case basis. This may
include, for example, blackout periods for communications with
issuers/clients. |
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| Equity investments |
|
A conflict of interest may arise where
client accounts and/ or State Street Global Advisors pooled funds, where
State Street Global Advisors acts as trustee, may hold shares in State
Street Corporation or other State Street Global Advisors affiliated
entities, such as mutual funds affiliated with SSGA Funds Management,
Inc. |
|
Mitigants may include, for example,
outsourcing voting decisions relating to a shareholder meeting of State
Street Corporation or other State Street Global Advisors affiliated
entities to independent outside third parties. In such cases, delegated
third parties exercise voting decisions based upon State Street Global
Advisors’ Voting Policy. |
| |
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| Outside business interest |
|
A conflict of interest may arise where an Asset Stewardship
Team employee or a key employee in the firm has an outside business
interest (such as a director role in a company we invest in, or in the
same industry as we invest). |
|
State Street Global Advisors maintains an Outside Activities
Policy and employees must submit a request requiring approval before
undertaking any outside activities that are captured by the Outside
Activities Policy. The request will be reviewed by the employee’s manager
and the Conduct Risk Management Office to ensure compliance with
applicable policies and procedures (such as the Global Anti-Corruption
Policy and the Standard of Conduct) and ensure potential conflicts are
mitigated.
Additional mitigation steps may be implemented on a case-by-case basis. This may
include, for example, retaining an independent fiduciary to make a voting
decision where State Street Global Advisors believes it may be conflicted
from voting due to an employee’s outside business
interest. |
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| Other personal conflicts |
|
A conflict of interest may arise where a
family member or other personal contact of an employee is employed by a
company in which we invest. |
|
Mitigation
steps may be implemented for personal conflicts on a case-by-case basis. This may
include, for example, filing a Personal Conflicts declaration with a
mitigation strategy to document how the conflict will be avoided. Such
strategies may include, for example, a member of the Asset Stewardship
Team with a conflict recusing him/herself from voting and participating in
engagement activities at the relevant company, and implementing blackout
periods for communications with issuers/clients. |
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| Securities lending |
|
We may lend securities that we hold in one
of our portfolios to another financial counterparty. This may create a
conflict of interest regarding whether to recall those securities to
enable us to vote on behalf of the portfolio in a shareholder resolution,
which may impact the intended securities lending income. |
|
Our approach to securities lending recall,
and any potential conflicts that may be created through our securities
lending recall activity, is governed by the Securities Lending Recall for
Proxy Voting Procedure, which is co-owned by the Asset Stewardship Team,
Securities Lending Team and Proxy Operations Group. The conflict
mitigation protocols include predefining criteria to systematically recall
shares, periodic review of the recall procedure by relevant stakeholders,
and periodic reporting of recall activities and associated forgone lending
income to the relevant internal governance
bodies. |
B-25
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| About State Street Global
Advisors |
|
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|
For four decades, State Street Global Advisors has served
the world’s governments, institutions and financial advisors. With a
rigorous, risk-aware approach built on research, analysis and
market-tested experience, we build from a breadth of index and active
strategies to create cost-effective solutions. And, as pioneers in index,
ETF, and ESG investing, we are always inventing new ways to invest. As a
result, we have become the world’s fourth-largest asset manager* with US
$3.48 trillion† under our care.
|
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* Pensions & Investments
Research Center, as of December 31, 2021. |
|
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|
† This figure is presented as of
December 31, 2022 and includes approximately $58.60 billion USD
of assets with respect to SPDR products for which State Street Global
Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing
agent. SSGA FD and State Street Global Advisors are affiliated. Please
note all AUM is unaudited. |
B-26
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of State Street Global Advisors Europe Limited, registered in Ireland
with company number
49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Canada: State Street Global Advisors, Ltd., 1981 McGill College Avenue,
Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street
East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900. France: State
Street Global Advisors Europe Limited, France Branch (“State Street Global
Advisors France”) is a branch of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. State Street Global Advisors France is registered in
France with company number RCS Nanterre 899 183 289, and its office is located
at Coeur Défense — Tour A — La Défense 4, 33e étage, 100, Esplanade du Général
de Gaulle, 92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1
44 45 41 92. Germany: State Street Global Advisors Europe Limited, Branch
in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch
of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State
Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan)
Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and
B-27
regulated by the Financial Conduct Authority. Registered in
England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of
its contents disclosed to third parties without SSGA’s express
written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies.
A portfolio’s ESG criteria may result in the portfolio investing
in industry sectors or securities which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not
represent investment performance. Results generated out of the
scoring model is based on sustainability and corporate governance dimensions of
a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in
Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation.
This means that this marketing communication (a) has not been prepared in
accordance with legal requirements designed to promote the independence of
investment research (b) is not subject to any prohibition on dealing ahead
of the dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1482714-3479898.4.1.GBL.RTL 0323 Exp. Date: 03/31/2024
B-28
March 2023
State Street Global Advisors’ Global Issuer and Stakeholder
Engagement Guidelines
State Street Global Advisors has developed engagement guidelines
to increase transparency around our engagement philosophy, approach, and
processes. These guidelines are designed to communicate with our investee
companies regarding the objectives of our engagement activities and to
facilitate a better understanding of our preferred terms of engagement. The
guidelines also outline our approach to engaging with activist investors and
shareholder proposal proponents.
B-29
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State
Street Global Advisors’ engagement activities are driven exclusively by
our goal to maximize and protect the long-term value of our clients’
assets. |
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| State Street Global Advisors’
Methodology for Developing its Annual Engagement Strategy |
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While we would like to maintain a
dialogue with all of our portfolio companies, we recognize the need to
focus our engagement efforts where we believe we will have maximum impact.
Each year, as part of its strategic review process, the Asset Stewardship
Team develops an annual engagement strategy, and it accordingly identifies
a priority list of companies that we intend to engage with during the
year. We focus on priorities that we consider important to be considered
by the portfolio companies in which we invest our clients’
assets. |
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The intensity and type of engagement
with a company is determined by State Street Global Advisors’ relative and
absolute holdings in that company. In addition, we factor in geographic
diversity in our engagement efforts to reflect the level of economic
exposure to various markets. Finally, we also consider the engagement
culture in a market or geographic region when developing our engagement
priority list and approach. |
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State
Street Global Advisors meets with companies through in-person and virtual meetings. We
prefer virtual meetings as we believe this is cost effective for our
clients and investee companies. This also helps us minimize our global
carbon footprint. |
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| Helpful
Information to Include in Engagement Request Emails to State Street Global
Advisors |
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To help expedite the review of engagement requests, please
include the following information in engagement request emails to State
Street Global Advisors:
• Company name and identifier (i.e. ticker)
• Topics the issuer is interested in discussing
• Upcoming meeting date, if applicable
• Issuer attendees and their titles
All requests for engagement should be sent to the Asset
Stewardship Team at [email protected]. |
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| Guidelines for Engaging with Investee
Companies |
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• During the ‘proxy season’, we prioritize conversations
related to companies’ shareholder meetings. In the ‘off-season’, we discuss our focus
areas and stewardship priorities with companies for whom these topics are
most material. |
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• We believe that as a long-term shareholder with
substantial holdings, it is important to establish a relationship and have
a direct communication channel with independent directors in our investee
companies. Therefore, as part of our engagement process, we prefer to meet
with the non-executive
chairperson/lead independent director and/or representative of key board
committees. Such meetings help us assess the quality and effectiveness of
the board, the extent of the oversight of management, and the board’s
perspectives on key issues, such as strategy, risk, capital allocation,
and compensation. It also allows us to escalate matters to the board’s
attention if management has been unresponsive to suggestions discussed
during prior engagements. |
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• After our initial meeting with members of the board, the
frequency of desired follow-up
meetings is determined by the nature of the issues discussed. We will
outline expectations and timelines for subsequent meetings during the
discussion. We follow similar guidelines for meeting requests with C-suite management representatives at
companies. |
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• Typically, we allow additional capacity for reactive
engagement in Q2 for markets such as the US, UK, EU, and Japan (Q4 for
Australian companies) where the majority of the companies have general
meetings between the months of April and June. |
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• We reserve the Q1, Q3, and Q4 time periods to conduct the
majority of our active engagements with some room for reactive engagement
with companies that have experienced a significant event or are seeking
approval for a corporate transaction, board transition, or other material
concern. |
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• Instances in which we are likely to accept engagement
requests include instances when: |
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– We have concerns about a ballot item; and |
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– We believe that engagement will better inform our voting
decision; and/or |
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– We want to discuss material risks with a
company |
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• Instances in which we are likely to decline engagement
requests include instances when: |
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– We do not have any immediate concerns about a ballot
item |
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– We believe we have adequate information to make an
informed voting decision on a ballot item |
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– Our position on a ballot item is addressed in our public
policy statement |
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– We have actively engaged with the company on matters
pertaining to the ballot proposal outside the ‘proxy
season’ |
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– We believe that the matter is best discussed outside the
vote solicitation period |
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• If we have provided feedback during the vote solicitation
period, we believe that any follow-up discussion with the company
should focus on the board or company’s response to our
feedback |
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• We track all feedback provided to investee companies and
routinely conduct follow-up
engagements to assess the progress made by a company toward the
incorporation of our feedback |
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• We welcome written submission of changes made by the
board to the company’s governance or remuneration policies and
practices
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| Guidelines for Engaging with Other
Investors Soliciting State Street Global Advisors’ Votes in Connection
with Vote-No Campaigns or
Shareholder Proposals |
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We believe it is good practice for
us to speak to other investors that are running proxy contests, putting
forth vote-no campaigns, or
proposing shareholder proposals at investee companies. However, we
generally limit such discussions with investors to one engagement unless
we believe that it is necessary for us to have a follow-up call. We welcome the
opportunity to review materials sent in advance of the proposed
discussion. To the extent possible, we review all materials made publicly
available by the investor or the company on a contested ballot item before
making a voting decision. Our primary purpose of engaging with investors
is: |
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• To gain a better understanding of their position or
concerns at investee companies. |
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• In proxy contest situations: |
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– To assess possible director candidates where investors are
seeking board representation in proxy contest situations |
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– To understand the investor’s proposed strategy for the
company and investment time horizon to assess their alignment with State
Street Global Advisors’ views and interests as a long-term
shareholder |
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All requests for engagement should be sent to
[email protected].
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Investor Engagement Protocol |
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State Street Global Advisors encourages boards of directors
to develop an investor engagement protocol or plan that establishes
policies and mechanisms through which independent directors communicate
with and receive feedback from institutional investors. The protocol would
help foster strong relationships between a company’s directors and its
investors, while promoting transparency, responsibility, and
accountability of the board.
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The protocol should identify key independent directors (such
as a non-executive chairman, lead
independent director, or a representative of a key board committee), who
would be mandated to engage with shareholders on a range of topics that
are of interest to State Street Global Advisors and/or other institutional
investors. A robust engagement protocol would also develop a crisis
communication plan for the board when institutional investors and the
market-at- large need to
communicate with independent directors, in a timely manner, about their
oversight and response to a developing concern facing the
company.
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| Requesting R-Factor™ Scores |
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Companies interested in receiving
their R-Factor™ scores should submit
an email request to [email protected] including the following
information: |
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• Company’s legal name |
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• Ticker |
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• ISIN |
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• Company’s headquarter location |
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• Contact name |
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• Contact’s Title at Company |
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• Contact email address (must be an official company email
address) |
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• Contact phone# |
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Please
note that R-Factor™ scores will be
provided only to employees affiliated with a company’s Investor Relations,
Chief Financial Officer, ESG/Sustainability Leadership or General
Secretary’s organizations. Please include attestation in your email
stating that you are affiliated with one of these functions. |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. And, as pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth-largest asset manager* with US $3.48
trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
B-33
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir
John Rogerson’s Quay, Dublin 2. Canada: State Street Global
Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T:
+514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6.
T: +647 775 5900. France: State Street Global Advisors Europe Limited,
France Branch (“State Street Global Advisors France”) is a branch of State
Street Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin
2. Hong Kong: State Street Global Advisors Asia Limited,
68/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. T:
+852 2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State
Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan,
Japan Securities Dealers’ Association. Netherlands: State
Street Global Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg
29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global
Advisors Netherlands is a branch office of State Street Global Advisors Europe
Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin 2. Singapore: State Street Global
Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
B-34
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed.
There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based
on sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1482720-3479897.3.1.GBL.RTL 0323 Exp. Date: 03/31/2024
B-35
March 2023
Australia and New Zealand
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for Australia
and New Zealand outline our approach to voting and engaging with companies
listed on stock exchanges in Australia and New Zealand. These Guidelines
complement and should be read in conjunction with State Street Global Advisors’
Global Proxy Voting and Engagement Principles, which outline our overall
approach to voting and engaging with companies, and State Street Global
Advisors’ Conflicts Mitigation Guidelines, which provide information about
managing the conflicts of interests that may arise through State Street Global
Advisors’ proxy voting and engagement activities.
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These Proxy Voting and Engagement
Guidelines (the “Guidelines”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Global Proxy Voting and Engagement Principles; however, State Street
Global Advisors also endeavors to show sensitivity to local market
practices when voting in these various markets.
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B-36
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State Street Global Advisors’ Proxy
Voting and Engagement Guidelines for Australia and New Zealand address our
market-specific approaches to topics including directors and boards,
accounting and audit-related issues, capital structure, reorganization and
mergers, remuneration, and other governance-related issues. |
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When voting and engaging with
companies in global markets, we consider market-specific nuances in the
manner that we believe will most likely protect and promote the long-term
economic value of client investments. We expect companies to observe the
relevant laws and regulations of their respective markets as well as
country-specific best practice guidelines and corporate governance codes.
We may hold companies in some markets to our global standards when we feel
that a country’s regulatory requirements do not address some of the key
philosophical principles that we believe are fundamental to our global
voting principles. |
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In our
analysis and research into corporate governance issues in Australia and
New Zealand, we expect all companies at a minimum to comply with the ASX
Corporate Governance Principles or the NZX Corporate Governance Code,
based on their locations. Consistent with the ‘comply or explain’
expectations established by the Principles and the Code, we encourage
companies to proactively disclose their level of compliance with the
Principles or the Code. In instances of non-compliance, and when companies
cannot explain the nuances of their governance structure effectively,
either publicly or through engagement, we may vote against the independent
board leader. |
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy |
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In our view, corporate governance
and sustainability issues are an integral part of the investment process.
The Asset Stewardship Team consists of investment professionals with
expertise in corporate governance, remuneration, accounting, and
environmental and social issues. We have established robust corporate
governance principles and practices that are backed with extensive
analytical expertise in order to understand the complexities of the
corporate governance landscape. We engage with companies to provide
insight on the principles and practices that drive our voting decisions.
We also conduct proactive engagement to address significant shareholder
concerns and issues in a manner consistent with maximizing shareholder
value. |
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The
team works alongside members of State Street Global Advisors’ Active
Fundamental and Asia-Pacific (“APAC”) investment teams, collaborating on
issuer engagements and providing input on company-specific
fundamentals. |
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| Directors and Boards |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
In order to carry out their primary responsibilities, directors have to
undertake activities that range from setting strategy and providing
guidance on strategic matters, overseeing executive management, to
selecting the CEO and other senior executives, creating a succession plan
for the board and management, and providing effective risk oversight,
including of risks related to sustainability issues. Further, we believe
good corporate governance necessitates the existence of effective internal
controls and risk management systems, which should be governed by the
board. |
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State Street Global Advisors
believes that a well-constituted board of directors with a good balance of
skills, expertise, and independence provides the foundations for a
well-governed company. We view board quality as a measure of director
independence, director succession planning, board diversity, evaluations
and refreshment, and company governance practices. We vote for the (re-)election of directors on a case-by-case basis after
considering various factors including board quality, general market
practice, and availability of information on director skills and
expertise. |
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In our analysis of boards, we
consider whether board members have adequate skills to provide effective
oversight of corporate strategy, operations, and risks, including
environmental and social issues. Boards should also have a regular
evaluation process in place to assess the effectiveness of the board and
the skills of board members to address issues, such as emerging risks,
changes to corporate strategy, and diversification of operations and
geographic footprint. |
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We may
also consider board performance and directors who appear to be remiss in
the performance of their oversight responsibilities when analyzing their
suitability for reappointment (e.g. fraud, criminal wrongdoing and breach
of fiduciary responsibilities). |
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| Board Independence |
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In principle, we believe independent
directors are crucial to robust corporate governance and help management
establish sound corporate governance policies and practices. We believe a
sufficiently independent board will most effectively monitor management
and perform oversight functions necessary to protect shareholder
interests. |
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We expect boards of ASX 300 and New
Zealand listed companies to be comprised of at least a majority of
independent directors. At all other Australian listed companies, we expect
boards to be comprised of at least one-third independent
directors. |
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Our broad criteria for director
independence in Australia and New Zealand include factors such
as: |
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• Participation in related-party transactions and other
business relations with the company |
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• Employment history with
company |
B-38
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• Relations with controlling shareholders |
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• Family ties with any of the company’s advisers,
directors, or senior employees |
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| Separation
Chair/CEO |
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While
we are generally supportive of having the roles of chairman and CEO
separated in the Australian and New Zealand markets, we assess the
division of responsibilities between chairman and CEO on a case-by-case basis, giving
consideration to factors such as company-specific circumstances, overall
level of independence on the board and general corporate governance
standards in the company. Similarly, we will monitor for circumstances in
which a combined chairman/CEO is appointed or where a former CEO becomes
chairman. |
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| Director Time Commitments |
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When voting on the election or re-election of a director, we also
consider the number of outside board directorships that a non-executive and an executive may
undertake. Thus, State Street Global Advisors may take voting action
against a director who exceeds the number of board mandates listed
below: |
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Director nominees who sit on more than four public
company boards |
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For non-executive board chairs/lead
independent directors and director nominees who hold excessive
commitments, as defined above, we may consider waiving our policy and vote
in support of a director if a company discloses its director commitment
policy in a publicly available manner (e.g., corporate governance
guidelines, proxy statement, company website). This policy or associated
disclosure must include: |
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• A numerical limit on public company board seats a
director can serve on |
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— This limit cannot exceed our policy by more than one
seat |
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• Consideration of public company board leadership
positions (e.g., Committee Chair) |
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• Affirmation that all directors are currently compliant
with the company policy |
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• Description of an annual policy review process undertaken
by the Nominating Committee to evaluate outside director time
commitments |
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If a director is imminently leaving
a board and this departure is disclosed in a written, time-bound and
publicly-available manner, we may consider waiving our withhold vote when
evaluating the director for excessive time
commitments. |
B-39
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Service
on a mutual fund board, the board of a UK investment trust or a Special
Purpose Acquisition Company (SPAC) board is not considered when evaluating
directors for excessive commitments. However, we do expect these roles to
be considered by nominating committees when evaluating director time
commitments. |
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| Director
Attendance at Board Meetings |
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We also
consider attendance at board meetings and may withhold votes from
directors who attend less than 75 percent of board meetings without
appropriate explanation or providing reason for their failure to meet the
attendance threshold. In addition, we monitor other factors that may
influence the independence of a non-executive director, such as
performance-related pay, cross-directorships, significant shareholdings,
and tenure. We support the annual election of directors and encourage
Australian and New Zealand companies to adopt this practice. |
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| Board Committees |
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We believe companies should have
committees for audit, remuneration, and nomination oversight. The audit
committee is responsible for monitoring the integrity of the financial
statements of the company, appointing external auditors, monitoring their
qualifications and independence, and their effectiveness and resource
levels. ASX Corporate Governance Principles requires listed companies to
have an audit committee of at least three members all of whom are non-executive directors and a majority
of whom are independent directors. It also requires that the committee be
chaired by an independent director who is not the chair of the board. We
hold Australian and New Zealand companies to our global standards for
developed financial markets by requiring that all members of the audit
committee be independent directors. |
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The
nomination committee is responsible for evaluating and reviewing the
balance of skills, knowledge, and experience of the board. It also ensures
that adequate succession plans are in place for directors and the CEO. We
may vote against the re-election
of members of the nomination committee if the board has failed to address
concerns over board structure or succession. |
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| Board Gender Diversity |
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We expect boards of all listed
companies to have at least one female board member and the boards of ASX
300 companies to be composed of at least 30 percent women directors.
If a company does not meet the applicable expectation, State Street Global
Advisors may vote against the Chair of the board’s nominating committee or
the board leader in the absence of a nominating committee. Additionally,
if a company does not meet the applicable expectation for three
consecutive years, State Street Global Advisors may vote against all
incumbent members of the nominating committee or those persons deemed
responsible for the nomination process. |
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We may waive this voting guideline
if a company engages with State Street Global Advisors and provides a
specific, timebound plan for either reaching the 30-percent threshold (ASX 300) or for
adding a woman director (non-ASX
300). |
B-40
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| Board Responsiveness to High Dissent
Against Pay Proposals |
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Executive pay is another important
aspect of corporate governance. We believe that executive pay should be
determined by the board of directors. We expect companies to have in place
remuneration committees to provide independent oversight over executive
pay. ASX Corporate Governance Principles require listed companies to have
a remuneration committee of at least three members all of whom are non-executive directors and a majority
of whom are independent directors. Similarly, the NZX Corporate Governance
Code recommends that at least a majority of remuneration committee members
be independent. |
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Since Australia has a non-binding vote on pay with a two-strike rule requiring a board spill
vote in the event of a second strike, we believe that the vote provides
investors a mechanism to address concerns they may have on the quality of
oversight provided by the board on remuneration issues. Accordingly, our
voting guidelines accommodate local market practice. |
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We
believe poorly structured executive compensation plans pose increasing
reputational risk to companies. Ongoing high level of dissent against a
company’s compensation proposals may indicate that the company is not
receptive to investor concerns. If the level of dissent against a
company’s remuneration report and/or remuneration policy is consistently
high, and we have determined that a vote against a pay-related proposal is warranted in
the third consecutive year, we may vote against the Chair of the
remuneration committee. |
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| Climate-related Disclosure |
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State Street Global Advisors finds that the recommendations
of the Taskforce on Climate-related Financial Disclosures (TCFD) provide
the most effective framework for disclosure of climate-related risks and
opportunities.
As such, we may take voting action against companies in the
ASX 200 that fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate related risks and opportunities, in accordance with
the TCFD framework. |
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| Indemnification and Limitations on Liability |
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Generally, State Street Global Advisors supports proposals
to limit directors’ liability and/or expand indemnification and liability
protection up to the limit provided by law, if he or she has not acted in
bad faith, gross negligence, or reckless disregard of the duties involved
in the conduct of his or her office. |
B-41
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Shareholder Rights
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices.
Recognizing the success of virtual and hybrid shareholder
meetings and a shifting regulatory environment, we will generally support
proposals that grant boards the right to hold shareholder meetings in a
virtual or hybrid format as long as companies uphold the following best
practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a
company breaches of any of the criteria above, we may vote against the
Chair of the nominating committee. |
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| Accounting and Audit- Related Issues |
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Companies should have robust internal audit and internal
control systems designed for effective management of any potential and
emerging risks to company operations and strategy. The responsibility of
setting out an internal audit function lies with the audit committee,
which should have independent non-executive directors designated as
members. |
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| Appointment of External Auditors |
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State
Street Global Advisors believes that a company’s auditor is an essential
feature of an effective and transparent system of external supervision.
Shareholders should be given the opportunity to vote on their appointment
or to re-appoint at the annual
meeting. When appointing external auditors and approving audit fees, we
will take into consideration the level of detail in company disclosures.
We will generally not support resolutions if adequate breakdown is not
provided and if non-audit fees
are more than 50 percent of audit fees. In addition, we may vote
against members of the audit committee if we have concerns with
audit-related issues or if the level of non-audit fees to audit fees is
significant. In certain circumstances, we may consider auditor tenure when
evaluating the audit process. |
B-42
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| Approval
of Financial Statements |
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We
believe the disclosure and availability of reliable financial statements
in a timely manner is imperative for the investment process. We expect
external auditors to provide assurance of a company’s financial condition.
Hence, we may vote against the approval of financial statements if i) they
have not been disclosed or audited; ii) the auditor opinion is
qualified/adverse, or the auditor has issued a disclaimer of opinion; or
iii) the auditor opinion is not disclosed. |
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Capital Structure, Reorganization, and
Mergers
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| Share Issuances |
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The ability to raise capital is
critical for companies to carry out strategy, to grow, and to achieve
returns above their cost of capital. The approval of capital raising
activities is fundamental to shareholders’ ability to monitor the returns
and to ensure capital is deployed efficiently. State Street Global
Advisors supports capital increases that have sound business reasons and
are not excessive relative to a company’s existing capital
base. |
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Pre-emption rights are a fundamental
right for shareholders to protect their investment in a company. Where
companies seek to issue new shares without pre-emption rights, we may vote against
if such authorities are greater than 20 percent of the issued share
capital. We may also vote against resolutions seeking authority to issue
capital with pre-emption rights
if the aggregate amount allowed seems excessive and is not justified by
the board. Generally, we are against capital issuance proposals greater
than 100 percent of the issued share capital when the proceeds are
not intended for specific purpose. |
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| Share
Repurchase Programs |
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We
generally support proposals to repurchase shares, unless the issuer does
not clearly state the business purpose for the program, a definitive
number of shares to be repurchased, and the timeframe for the repurchase.
We may vote against share repurchase requests that allow share repurchases
during a takeover period. |
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| Dividends |
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We
generally support dividend payouts that constitute 30 percent or more
of net income. We may vote against a dividend payout if the dividend
payout ratio has been consistently below 30 percent without adequate
explanation. We may also vote against if the payout is excessive given the
company’s financial position. Particular attention will be warranted when
the payment may damage the company’s long-term financial
health. |
B-43
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| Mergers and Acquisitions |
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Mergers or reorganization of the
company structure often involve proposals relating to reincorporation,
restructurings, liquidations, and other major changes to the corporation.
Proposals that are in the best interests of shareholders, demonstrated by
enhancing share value or improving the effectiveness of the company’s
operations, will be supported. In general, provisions that are not viewed
as financially sound or are thought to be destructive to shareholders’
rights are not supported. We will generally support transactions that
maximize shareholder value. Some of the considerations
include: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including, director and/or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may vote against a transaction
considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting |
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| Anti-Takeover Measures |
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We
oppose anti-takeover defenses, such as authorities for the board to issue
warrants convertible into shares to existing shareholders during a hostile
takeover. |
B-44
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Remuneration
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| Executive
Pay |
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There
is a simple underlying philosophy that guides State Street Global
Advisors’ analysis of executive pay; there should be a direct relationship
between remuneration and company performance over the long term.
Shareholders should have the opportunity to assess whether pay structures
and levels are aligned with business performance. When assessing
remuneration reports, we consider various factors, such as adequate
disclosure of different remuneration elements, absolute and relative pay
levels, peer selection and benchmarking, the mix of long-term and
short-term incentives, alignment of pay structures with shareholder
interests as well as with corporate strategy and performance. We may
oppose remuneration reports in which there seems to be a misalignment
between pay and shareholders’ interests and where incentive policies and
schemes have a re-test option or
feature. We may also vote against the re-election of members of the
remuneration committee if we have serious concerns about remuneration
practices and if the company has not been responsive to shareholder
pressure to review its approach. |
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| Equity
Incentive Plans |
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We may
not support proposals on equity-based incentive plans where insufficient
information is provided on matters, such as grant limits, performance
metrics, performance, and vesting periods and overall dilution. Generally,
we do not support options under such plans being issued at a discount to
market price nor plans that allow for re-testing of performance
metrics. |
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| Non-Executive Director Pay |
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Authorities that seek shareholder approval for non-executive directors’ fees generally
are not controversial. We generally support resolutions regarding
directors’ fees unless disclosure is poor and we are unable to determine
whether the fees are excessive relative to fees paid by other comparable
companies. We will evaluate any non-cash or performance-related pay to
non-executive directors on a
company-by-company
basis. |
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| Risk
Management and Oversight |
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State
Street Global Advisors believes that risk management is a key function of
the board, which is responsible for setting the overall risk appetite of a
company and for providing oversight on the risk management process
established by senior executives at a company. We allow boards to have
discretion over the ways in which they provide oversight in this area.
However, we expect companies to disclose how the board provides oversight
on its risk management system and risk identification. Boards should also
review existing and emerging risks that evolve in tandem with the
political and economic landscape or as companies diversify or expand their
operations into new areas. |
B-45
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As responsible stewards, we believe
in the importance of effective risk management and oversight of issues
that are material to a company. To effectively assess the risk of our
clients’ portfolios and the broader market, we expect our portfolio
companies to manage risks and opportunities that are material and
industry-specific and that have a demonstrated link to long-term value
creation, and to provide high-quality disclosure of this process to
shareholders. |
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Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social
Issues |
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As a fiduciary, State Street Global
Advisors takes a comprehensive approach to engaging with our portfolio
companies about material environmental and social factors. Our Asset
Stewardship program prioritization process allows us to proactively
identify companies for engagement and voting in order to mitigate
sustainability risks in our portfolio. Through engagement, we aim to build
long-term relationships with the issuers in which we invest on behalf of
our clients and to address a broad range of topics relating to the
promotion of long-term shareholder value creation. When voting, we
fundamentally consider whether the adoption of a shareholder proposal
addressing an environmental or social topic material to the company would
promote long-term shareholder value in the context of the company’s
existing practices and disclosures as well as existing market
practice. |
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For
more information on our approach to environmental and social issues,
please see our Global Proxy Voting and Engagement Guidelines for
Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. And, as pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth-largest asset manager* with US $3.48
trillion† under our care.
. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is presented as of December 31, 2022 and
includes approximately $58.60 billion USD of assets with respect to
SPDR products for which State Street Global Advisors Funds Distributors,
LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street
Global Advisors are affiliated. Please note all AUM is
unaudited. |
B-46
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State Street
Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A
3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario
M5C 3G6. T: +647 775 5900. France: State Street Global Advisors Europe
Limited, France Branch (“State Street Global Advisors France”) is a branch of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense —Tour A —La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Hong Kong: State Street Global Advisors Asia
Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global
Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934.
T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global
Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is
a branch of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. State Street Global Advisors Italy is registered in Italy with company number
11871450968 —REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325
Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No.
B-47
2509928. VAT No. 5776591 81. Registered office: 20 Churchill
Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350.
United States: State Street Global Advisors, 1 Iron Street, Boston, MA
02210-1641. T: +1 617 786 3000.
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA
unless otherwise noted and has been obtained from sources believed
to be reliable, but its accuracy is not guaranteed. There is no representation
or warranty as to the current accuracy, reliability or completeness of, nor
liability for, decisions based on such information and it should not be relied
on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not
represent investment performance. Results generated out of the
scoring model is based on sustainability and corporate governance dimensions of
a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance with
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(b) is not subject to any prohibition on dealing ahead of the dissemination of
investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1482395-3479907.3.1.GBL.RTL 0323
Exp. Date: 03/31/2024
B-48
March 2023
Continental Europe
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for
Continental Europe outline our approach to voting and engaging with companies
listed on stock exchanges in European markets, excluding the United Kingdom and
Ireland. These Guidelines complement and should be read in conjunction with
State Street Global Advisors’ Global Proxy Voting and Engagement Principles,
which outline our overall approach to voting and engaging with companies, and
State Street Global Advisors’ Conflicts Mitigation Guidelines, which provide
information about managing the conflicts of interests that may arise through
State Street Global Advisors’ proxy voting and engagement activities.
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These Proxy Voting and Engagement
Guidelines (the “Guidelines”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Global Proxy Voting and Engagement Principles; however, State Street
Global Advisors also endeavors to show sensitivity to local market
practices when voting in these various markets.
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B-49
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State Street Global Advisors’ Proxy
Voting and Engagement Guidelines for Continental Europe address our
market-specific approaches to topics including directors and boards,
accounting and audit-related issues, capital structure, reorganization and
mergers, remuneration, and other governance-related issues. |
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When voting and engaging with
companies in European markets, we consider market-specific nuances in the
manner that we believe will most likely protect and promote the long-term
economic value of client investments. We expect companies to observe the
relevant laws and regulations of their respective markets, as well as
country-specific best practice guidelines and corporate governance codes.
We may hold companies in some markets to our global standards when we feel
that a country’s regulatory requirements do not address some of the key
philosophical principles that we believe are fundamental to our global
voting principles. |
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In our analysis and research into corporate governance
issues at European companies, we expect all companies at a minimum to
comply with guidance issued by the European Commission and
country-specific governance codes. Consistent with the “comply-or-explain” expectations
commonly established by guidance and codes, we encourage companies to
proactively disclose their level of compliance with applicable provisions
and requirements. In cases of non-compliance, and when companies
cannot explain the nuances of their governance structures effectively,
either publicly or through engagement, we may vote against the independent
board leader.
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy |
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In our view, corporate governance and sustainability issues
are an integral part of the investment process. The Asset Stewardship Team
consists of investment professionals with expertise in corporate
governance, remuneration, accounting, and environmental and social issues.
We have established robust corporate governance principles and practices
that are backed with extensive analytical expertise in order to understand
the complexities of the corporate governance landscape. We engage with
companies to provide insight on the principles and practices that drive
our voting decisions. We also conduct proactive engagements to address
significant shareholder concerns and issues in a manner consistent with
maximizing shareholder value.
The team works alongside members of State Street Global
Advisors’ Active Fundamental and Europe, Middle East and Africa (“EMEA”)
investment teams, collaborating on issuer engagements and providing input
on company-specific fundamentals.
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| Directors and Boards |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
In order to carry out their primary responsibilities, directors have to
undertake activities that range from setting strategy and providing
guidance on strategic matters, overseeing executive management, to
selecting the CEO and other senior executives, creating a succession plan
for the board and management, and providing effective risk oversight,
including of risks related to sustainability issues. Further, we believe
good corporate governance necessitates the existence of effective internal
controls and risk management systems, which should be governed by the
board. |
B-50
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We believe that a well-constituted board of directors with a
balance of skills, expertise and independence, provides the foundations
for a well-governed company. We view board quality as a measure of
director independence, director succession planning, board diversity,
evaluations and refreshment, and company governance practices. We vote for
the (re-)election of directors on
a case-by-case basis after
considering various factors, including board quality, general market
practice, and availability of information on director skills and
expertise.
In our analysis of boards, we consider whether board members
have adequate skills to provide effective oversight of corporate strategy,
operations, and risks, including environmental and social issues. Boards
should also have a regular evaluation process in place to assess the
effectiveness of the board and the skills of board members to address
issues such as emerging risks, changes to corporate strategy, and
diversification of operations and geographic footprint.
We may also consider factors such as board performance and
directors who appear to be remiss in the performance of their oversight
responsibilities (e.g. fraud, criminal wrongdoing and/or breach of
fiduciary responsibilities). |
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| Board Independence |
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In principle, we believe independent directors are crucial
to robust corporate governance and help management establish sound
corporate governance policies and practices. We believe a sufficiently
independent board will most effectively monitor management and perform
oversight functions necessary to protect shareholder interests.
Our broad criteria for director independence in European
companies include factors such as: |
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• Participation in related-party transactions and other
business relations with the company |
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• Employment history with the company |
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• Relations with controlling shareholders |
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• Family ties with any of the company’s advisers, directors
or senior employees |
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• Serving as an employee or government
representative |
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• Overall average board tenure and individual director
tenure at issuers with classified and de-classified boards, respectively,
and |
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• Company classification of a director as non-independent |
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While overall board independence
requirements and board structures differ from market to market, we
consider voting against directors we deem non-independent if overall board
independence is below 33 percent or if overall independence level is
below 50 percent after excluding employee representatives and/or
directors elected in accordance with local laws who are not elected by
shareholders. We may withhold support for a proposal to discharge the
board if a company does not meet adequate governance standards or board
level independence. |
B-51
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| Separation
Chair/CEO |
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We also
assess the division of responsibilities between chair and CEO on a case-by-case basis, giving
consideration to factors such as overall level of independence on the
board and general corporate governance standards in the company. However,
we may take voting action against the chair or members of the nominating
committee at the STOXX Europe 600 companies that have combined the roles
of chair and CEO and have not appointed an independent deputy chair or a
lead independent director. |
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| Director Time Commitments |
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When voting on the election or re-election of a director, we also
consider the number of outside board directorships a non-executive and an executive may
undertake. Thus, State Street Global Advisors may take voting action
against a director who exceeds the number of board mandates listed
below: |
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Director nominees who sit on more than four public
company boards |
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For non-executive board chairs/lead
independent directors and director nominees who hold excessive
commitments, as defined above, we may consider waiving our policy and vote
in support of a director if a company discloses its director commitment
policy in a publicly available manner (e.g., corporate governance
guidelines, proxy statement, company website). This policy or associated
disclosure must include: |
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• A numerical limit on public company board seats a
director can serve on |
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– This limit cannot exceed our policy by more than one
seat |
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• Consideration of public company board leadership
positions (e.g., Committee Chair) |
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• Affirmation that all directors are currently compliant
with the company policy |
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• Description of an annual policy review process undertaken
by the Nominating Committee to evaluate outside director time
commitments |
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If a director is imminently leaving
a board and this departure is disclosed in a written, time-bound and
publicly-available manner, we may consider waiving our withhold vote when
evaluating the director for excessive time commitments. |
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Service on a mutual fund board, the
board of a UK investment trust or a Special Purpose Acquisition Company
(SPAC) board is not considered when evaluating directors for excessive
commitments. However, we do expect these roles to be considered by
nominating committees when evaluating director time
commitments. |
B-52
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| Director Attendance at Board
Meetings |
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We also consider attendance at board meetings and may
withhold votes from directors who attend less than 75 percent of
board meetings without appropriate explanation or providing reason for
their failure to meet the attendance threshold. In addition, we monitor
other factors that may influence the independence of a non-executive director, such as
performance-related pay, cross-directorships and significant
shareholdings. Moreover, we may vote against the election of a director
whose biographical disclosures are insufficient to assess his or her role
on the board and/or independence.
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| Board Gender Diversity |
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We expect boards of all listed companies to have at least
one female board member and the boards of STOXX 600 companies to be
composed of at least 30 percent women directors. If a company does
not meet the applicable expectation, State Street Global Advisors may vote
against the Chair of the board’s nominating committee or the board leader
in the absence of a nominating committee. Additionally, if a company does
not meet the applicable expectation for three consecutive years, State
Street Global Advisors may vote against all incumbent members of the
nominating committee or those persons deemed responsible for the
nomination process.
We may waive this voting guideline if a company engages with
State Street Global Advisors and provides a specific, timebound plan for
either reaching the 30-percent
threshold (STOXX 600) or for adding a woman director (non-STOXX 600).
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| Length of Board Terms |
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Although we generally are in favour of the annual election
of directors, we recognise that director terms vary considerably in
different European markets. We may vote against article/bylaw changes that
seek to extend director terms. In addition, we may vote against directors
in certain markets if their terms extend beyond four years.
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| Board Committees |
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We believe companies should have relevant board level
committees for audit, remuneration and nomination oversight. The audit
committee is responsible for monitoring the integrity of the financial
statements of the company, appointing external auditors, monitoring their
qualifications and independence, and assessing effectiveness and resource
levels. Similarly, executive pay is an important aspect of corporate
governance, and it should be determined by the board of directors. We
expect companies to have remuneration committees to provide independent
oversight of executive pay. We may vote against nominees who are executive
members of audit or remuneration committees.
In certain European markets, it is not uncommon for the
election of directors to be presented in a single slate. In these cases,
where executives serve on the audit or the remuneration committees, we may
vote against the entire slate.
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| Board Responsiveness to High Dissent
Against Pay Proposals |
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Poorly-structured executive
remuneration plans pose increasing reputational risk to companies. Ongoing
high levels of dissent against a company’s remuneration proposals may
indicate that the company is not receptive to investor concerns. If the
level of dissent against a company’s remuneration report and/or
remuneration policy is consistently high, and we have determined that a
vote against a remuneration-related proposal is warranted in the third
consecutive year, we may vote against the Chair of the remuneration
committee. |
B-53
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| Climate-related Disclosure |
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State Street Global Advisors finds that the recommendations
of the Task Force on Climate-related Financial Disclosures (TCFD) provide
the most effective framework for disclosure of climate-related risks and
opportunities.
As such, we may take voting action against companies in the
STOXX 600 that fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate-related risks and opportunities, in accordance with
the TCFD framework. |
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| Indemnification and Limitations on
Liability |
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Generally, we support proposals to limit directors’
liability and/or expand indemnification and liability protection up to the
limit provided by law if a director has not acted in bad faith, with gross
negligence, or with reckless disregard of the duties involved in the
conduct of his or her office.
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| Shareholder Rights |
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices.
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a company breaches of any of the
criteria above, we may vote against the Chair of the nominating
committee. |
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| Accounting and Audit-Related Issues |
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Companies should have robust
internal audit and internal control systems designed for effective
management of any potential and emerging risks to company operations and
strategy. The responsibility of setting up an internal audit function lies
with the audit committee, which should have as members independent non-executive
directors. |
B-54
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| Appointment of External
Auditors |
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We believe that a company’s auditor is an essential feature
of an effective and transparent system of external supervision.
Shareholders should be given the opportunity to vote on their appointment
or re-appoint them at the annual
meeting. When appointing external auditors and approving audit fees, we
consider the level of detail in company disclosures; we will generally not
support such resolutions if adequate breakdown is not provided and if
non-audit fees are more than
50 percent of audit fees. In addition, we may vote against members of
the audit committee if we have concerns with audit-related issues or if
the level of non-audit fees to
audit fees is significant. We may consider auditor tenure when evaluating
the audit process in certain circumstances.
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| Limit Legal Liability of External
Auditors |
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We generally oppose limiting the legal liability of audit
firms as we believe this could create a negative impact on the quality of
the audit function.
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| Approval
of Financial Statements |
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We believe the disclosure and availability of reliable
financial statements in a timely manner is imperative for the investment
process. We expect external auditors to provide assurance of a company’s
financial condition. Hence, we may vote against the approval of financial
statements if i) they have not been disclosed or audited; ii) the auditor
opinion is qualified/adverse, or the auditor has issued a disclaimer of
opinion; or iii) the auditor opinion is not disclosed.
Capital Structure, Reorganization, and Mergers In some
European markets, differential voting rights continue to exist. State
Street Global Advisors supports the one-share, one-vote policy and favors a share
structure where all shares have equal voting rights. We believe pre-emption rights should be introduced
for shareholders in order to provide adequate protection from excessive
dilution from the issuance of new shares or convertible securities to
third parties or a small number of select shareholders. |
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| Unequal
Voting Rights |
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We
generally oppose proposals authorizing the creation of new classes of
common stock with superior voting rights. We will generally oppose the
creation of new classes of preferred stock with unspecified voting,
conversion, dividend distribution and other rights. In addition, we will
not support capitalization changes that add classes of stock with
undefined voting rights or classes that may dilute the voting interests of
existing shareholders. We support proposals to abolish voting caps and
capitalization changes that eliminate other classes of stock and/or
unequal voting rights. |
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| Increase
in Authorized Capital |
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The
ability to raise capital is critical for companies to carry out strategy,
to grow, and to achieve returns above their cost of capital. The approval
of capital raising activities is fundamental to shareholders’ ability to
monitor returns and to ensure capital is deployed efficiently. We support
capital increases that have sound business reasons and are not excessive
relative to a company’s existing capital base. |
B-55
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Pre-emption rights are a fundamental
right for shareholders to protect their investment in a company. Where
companies seek to issue new shares whilst disapplying pre-emption rights, we may vote against
if such authorities are greater than 20 percent of the issued share
capital. We may also vote against resolutions that seek authority to issue
capital with pre-emption rights
if the aggregate amount allowed seems excessive and is not justified by
the board. Generally, we oppose capital issuance proposals greater than
100 percent of the issued share capital when the proceeds are not
intended for a specific purpose. |
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| Share
Repurchase Programs |
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We
typically support proposals to repurchase shares; however, there are
exceptions in some cases. We do not support repurchases if the issuer does
not clearly state the business purpose for the program, a definitive
number of shares to be repurchased, the range of premium/discount to
market price at which the company can repurchase shares, and the timeframe
for the repurchase. We may vote against share repurchase requests that
allow share repurchases during a takeover period. |
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| Dividends |
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We
generally support dividend payouts that constitute 30 percent or more
of net income. We may vote against the dividend payouts if the dividend
payout ratio has been consistently below 30 percent without adequate
explanation or the payout is excessive given the company’s financial
position. Particular attention will be paid to cases in which the payment
may damage the company’s long-term financial health. |
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| Related-Party Transactions |
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Some
companies in European markets have a controlled ownership structure and
complex cross-shareholdings between subsidiaries and parent companies
(“related companies”). Such structures may result in the prevalence of
related-party transactions between the company and its various
stakeholders, such as directors and management, subsidiaries and
shareholders. In markets where shareholders are required to approve such
transactions, we expect companies to provide details of the transaction,
such as the nature, the value and the purpose of such a transaction. We
also encourage independent directors to ratify such transactions. Further,
we encourage companies to describe the level of independent board
oversight and the approval process, including details of any independent
valuations provided by financial advisors on related-party
transactions. |
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| Mergers
and Acquisitions |
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Mergers
or restructurings often involve proposals relating to reincorporation,
restructurings, mergers, liquidation and other major changes to the
corporation. Proposals will be supported if they are in the best interest
of the shareholders, which is demonstrated by enhancing share value or
improving the effectiveness of the company’s operations. In general,
provisions that are not viewed as financially sound or are thought to be
destructive to shareholders’ rights are not
supported. |
B-56
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We will generally support
transactions that maximize shareholder value. Some of the considerations
include: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including director and/or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may vote against a transaction
considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting. |
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| Anti-Takeover Measures |
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European markets have diverse regulations concerning the use
of share issuances as takeover defenses, with legal restrictions lacking
in some markets. We support the one-share, one-vote policy. For example,
dual-class capital structures entrench certain shareholders and
management, insulating them from possible takeovers. We oppose unlimited
share issuance authorizations because they can be used as anti-takeover
devices. They have the potential for substantial voting and earnings
dilution. We also monitor the duration of time for authorities to issue
shares, as well as whether there are restrictions and caps on multiple
issuance authorities during the specified time periods. We oppose
antitakeover defenses, such as authorities for the board when subject to a
hostile takeover to issue warrants convertible into shares to existing
shareholders. |
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Remuneration
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| Executive Pay |
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Despite the differences among the
various types of plans and awards, there is a simple underlying philosophy
that guides our analysis of executive pay: there should be a direct
relationship between remuneration and company performance over the long
term. |
B-57
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Shareholders should have the opportunity to assess whether
pay structures and levels are aligned with business performance. When
assessing remuneration reports, we consider factors such as adequate
disclosure of remuneration elements, absolute and relative pay levels,
peer selection and benchmarking, the mix of long-term and short-term
incentives, alignment of pay structures with shareholder interests,
corporate strategy and performance. We may oppose remuneration reports
where pay seems misaligned with shareholders’ interests. We may also vote
against the re-election of
members of the remuneration committee if we have serious concerns about
remuneration practices and if the company has not been responsive to
shareholder pressure to review its approach. |
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| Equity
Incentives Plans |
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We may
not support proposals regarding equity-based incentive plans where
insufficient information is provided on matters, including grant limits,
performance metrics, performance and vesting periods, and overall
dilution. Generally, we do not support options under such plans being
issued at a discount to market price or plans that allow for retesting of
performance metrics. |
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| Non-Executive Director Pay |
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In
European markets, proposals seeking shareholder approval for non-executive directors’ fees are
generally not controversial. We typically support resolutions regarding
directors’ fees unless disclosure is poor and we are unable to determine
whether the fees are excessive relative to fees paid by comparable
companies. We will evaluate any non-cash or performance-related pay to
non-executive directors on a
company-by-company
basis. |
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| Risk Management |
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We believe that risk management is a key function of the
board, which is responsible for setting the overall risk appetite of a
company and for providing oversight on the risk management process
established by senior executives at a company. We allow boards to have
discretion regarding the ways in which they provide oversight in this
area. However, we expect companies to disclose how the board provides
oversight on its risk management system and risk identification. Boards
should also review existing and emerging risks that evolve in tandem with
the political and economic landscape or as companies diversify or expand
their operations into new areas.
As responsible stewards, we believe in the importance of
effective risk management and oversight of issues that are material to a
company. To effectively assess the risk of our clients’ portfolios and the
broader market, we expect our portfolio companies to manage risks and
opportunities that are material and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality disclosure of this process
to shareholders.
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B-58
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Consistent with this perspective, we may seek to engage
with our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social Issues |
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As a fiduciary, State Street Global Advisors takes a
comprehensive approach to engaging with our portfolio companies about
material environmental and social factors. Our Asset Stewardship program
prioritization process allows us to proactively identify companies for
engagement and voting in order to mitigate sustainability risks in our
portfolio. Through engagement, we aim to build long-term relationships
with the issuers in which we invest on behalf of our clients and to
address a broad range of topics relating to the promotion of long-term
shareholder value creation. When voting, we fundamentally consider whether
the adoption of a shareholder proposal addressing an environmental or
social topic material to the company would promote long-term shareholder
value in the context of the company’s existing practices and disclosures
as well as existing market practice.
For more information on our approach to environmental and
social issues, please see our Global Proxy Voting and Engagement
Guidelines for Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. And, as pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth-largest asset manager* with US $3.48
trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of December 31, 2022 and includes approximately $58.60
billion USD of assets with respect to SPDR products for which State Street
Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the
marketing agent. SSGA FD and State Street Global Advisors are affiliated.
Please note all AUM is unaudited. |
B-59
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global
Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s
Quay, Dublin 2. Canada: State Street Global Advisors, Ltd.,
1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400
and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775
5900. France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s
Quay, Dublin 2.
State Street Global Advisors France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located at Coeur
Défense — Tour A — La Défense 4, 33e étage,100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France. T: +33 1
44 45 40 00. F: +33 1 44 45 41 92.
Germany: State Street Global Advisors Europe Limited,
Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of
Ireland, and whose registered office is at 78 Sir John Rogerson’s
Quay, Dublin 2.
Hong Kong: State Street Global Advisors Asia Limited,
68/F, Two International Finance Centre, 8 Finance Street, Central,
Hong Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street
Global Advisors Europe Limited is regulated by the Central Bank of Ireland.
Registered office address 78 Sir John Rogerson’s Quay, Dublin 2.
Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Italy: State Street Global Advisors Europe Limited, Italy Branch (“State
Street Global Advisors Italy”) is a branch of State Street Global Advisors
Europe Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is
registered in Italy with company number 11871450968 —REA: 2628603
and VAT number 11871450968, and its office is located at Via Ferrante Aporti,
10 - 20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155.
Japan: State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills
Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities
Dealers’ Association. Netherlands: State Street
Global Advisors Netherlands,
Apollo Building 7th floor, Herikerbergweg
29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000. State
Street Global
Advisors Netherlands is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s
Quay, Dublin 2. Singapore: State Street Global Advisors Singapore
Limited, 168, Robinson Road, #33-01
Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the
Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Registered with the Register
of Commerce Zurich CHE-105.078.458. T:
+41 (0)44 245 70 00. F: +41 (0)44 245 70 16. United Kingdom: State Street
Global Advisors Limited. Authorised and regulated by the Financial Conduct
Authority. Registered in England. Registered No. 2509928. VAT No.
5776591 81. Registered office: 20 Churchill Place, Canary Wharf,
London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United States: State
Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641. T: +1 617 786
3000.
B-60
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of,
nor liability for, decisions based on such information and it
should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator
who are deemed both knowledgeable and experienced in matters
relating to investments. The products and services to which this communication
relates are only available to such persons and persons of any other description
(including retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
Marketing Communication’ in accordance with the Markets in Financial Instruments
Directive (2014/65/EU) or applicable Swiss regulation. This means that this
marketing communication (a) has not been prepared in accordance with legal
requirements designed to promote the independence of investment research
(b) is not subject to any prohibition on dealing ahead of the dissemination
of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1482701-3479909.3.1.GBL.RTL 0323 Exp. Date: 03/31/2024
B-61
March 2023
Japan
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for Japan
outline our approach to voting and engaging with companies listed on stock
exchanges in Japan. These Guidelines complement and should be read in
conjunction with State Street Global Advisors’ Global Proxy Voting and
Engagement Principles, which outline our overall approach to voting and engaging
with companies, and State Street Global Advisors’ Conflicts Mitigation
Guidelines, which provide information about managing the conflicts of interests
that may arise through State Street Global Advisors’ proxy voting and engagement
activities.
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These Proxy Voting and Engagement
Guidelines are also applicable to SSGA Funds Management, Inc.. SSGA Funds
Management, Inc.is an SEC-registered investment adviser. SSGA
Funds Management, Inc., State Street Global Advisors Trust Company, and
other advisory affiliates of State Street make up State Street Global
Advisors, the investment management arm of State Street Corporation.
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State Street Global Advisors’ Proxy Voting and Engagement
Guidelines for Japan address our market-specific approaches to topics
including directors and boards, accounting and audit-related issues,
capital structure, remuneration and mergers, compensation, and other
governance-related issues. When voting and engaging with companies in
global markets, we consider market-specific nuances in the manner that we
believe will most likely protect and promote the long-term economic value
of client investments. We expect all companies to observe the relevant
laws and regulations of their respective markets, as well as any
country-specific best practice guidelines and corporate governance codes.
We may hold companies in some markets to our global standards when we feel
that a country’s regulatory requirements do not address some of the key
philosophical principles that we believe are fundamental to our global
voting principles.
With companies in Japan, State Street Global Advisors takes
into consideration the unique aspects of Japanese corporate governance
structures. We recognize that under Japanese corporate law, companies may
choose between three structures of corporate governance: the statutory
auditor system, the committee structure and the hybrid
structure.
Most Japanese boards predominantly consist of executives and
non-independent outsiders
affiliated through commercial relationships or cross-shareholdings.
Nonetheless, when evaluating companies, State Street Global Advisors
expects the boards of Japanese companies to address conflicts of interest
and risk management, and to demonstrate an effective process for
monitoring management.
Regardless of the corporate governance structure a company
adopts, we expect all companies at a minimum to comply with Japan’s
Corporate Governance Code (the “Code”). Consistent with the ‘comply or
explain’ expectations established by the Code, we encourage companies to
proactively disclose their level of compliance with the Code. In instances
of non-compliance, and when
companies cannot explain the nuances of their governance structure
effectively, either publicly or through engagement, we may vote against
the board leader.
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy |
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In our view, corporate governance and sustainability issues
are an integral part of the investment process. The Asset Stewardship Team
consists of investment professionals with expertise in corporate
governance, remuneration, accounting, and environmental and social issues.
We have established robust corporate governance principles and practices
that are backed with extensive analytical expertise to understand the
complexities of the corporate governance landscape. We engage with
companies to provide insight on the principles and practices that drive
our voting decisions. We also conduct proactive engagement to address
significant shareholder concerns and issues in a manner consistent with
maximizing shareholder value.
The team works alongside members of State Street Global
Advisors’ Active Fundamental and Asia-Pacific (“APAC”) Investment Teams,
collaborating on issuer engagements and providing input on
company-specific fundamentals. |
B-63
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| Directors and Boards |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
In order to carry out their primary responsibilities, directors have to
undertake activities that range from setting strategy and providing
guidance on strategic matters, overseeing executive management, to
selecting the CEO and other senior executives, creating a succession plan
for the board and management, and providing effective risk oversight,
including of risks related to sustainability issues. Further, we believe
good corporate governance necessitates the existence of effective internal
controls and risk management systems, which should be governed by the
board. |
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State Street Global Advisors
believes that a well-constituted board of directors with a balance of
skills, expertise and independence provides the foundation for a
well-governed company. We view board quality as a measure of director
independence, director succession planning, board diversity, evaluations
and refreshment, and company governance practices. We vote for the (re-)election of directors on a case-by-case basis after considering
various factors, including board quality, general market practice, and
availability of information on director skills and expertise. |
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Japanese companies have the option
of having a traditional board of directors with statutory auditors, a
board with a committee structure, or a hybrid board with a board level
audit committee. We will generally support companies that seek shareholder
approval to adopt a committee or hybrid board structure. |
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Most Japanese issuers prefer the
traditional statutory auditor structure. Statutory auditors act in a
quasi-compliance role, as they are not involved in strategic
decision-making, nor are they part of the formal management decision
process. Statutory auditors attend board meetings, but do not have voting
rights at the board; however, they have the right to seek an injunction
and conduct broad investigations of unlawful behavior in the company’s
operations. |
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State Street Global Advisors will
support the election of statutory auditors unless the outside statutory
auditor nominee is regarded as non-independent based on our criteria,
the outside statutory auditor has attended less than 75 percent of
meetings of the board of directors or the board of statutory auditors
during the year under review, or the statutory auditor has been remiss in
the performance of their oversight responsibilities (fraud, criminal
wrongdoing, and breach of fiduciary responsibilities). |
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Board
Independence |
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In principle, we believe independent
directors are crucial to robust corporate governance and help management
establish sound corporate governance policies and practices. A
sufficiently independent board will most effectively monitor management
and perform oversight functions that are necessary to protect shareholder
interests. |
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We believe that boards of TOPIX 500
companies should have at least three independent directors and be at least
one-third independent. Otherwise,
we may oppose the board leader who is responsible for the director
nomination process. |
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For non-TOPIX 500 companies, we may oppose
the board leader if the board does not have at least two independent
directors. For companies with a committee structure or a hybrid board
structure, we also take into consideration the overall independence level
of the committees. |
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In determining director independence, we consider the
following factors:
• Participation in related-party transactions and other
business relations with the company
• Past employment with the company
• Professional services provided to the company
• Family ties with the company
Regardless of board structure, we may oppose the election of
a director for the following reasons:
• Failure to attend board meetings
• In instances of egregious actions related to a director’s
service on the board
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| Board Gender Diversity |
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We expect boards of all listed companies to have at least
one female board member. If a company does not meet this expectation,
State Street Global Advisors may vote against the Chair of the board’s
nominating committee or the board leader in the absence of a nominating
committee. Additionally, if a company does not meet this expectation for
three consecutive years, State Street Global Advisors may vote against all
incumbent members of the nominating committee or those persons deemed
responsible for the nomination process.
We may waive this voting guideline if a company engages with
State Street Global Advisors and provides a specific, timebound plan for
adding at least one woman to its board.
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| Climate-related Disclosures |
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State Street Global Advisors finds that the recommendations
of the Taskforce on Climate-related Financial Disclosures (TCFD) provide
the most effective framework for disclosure of climate-related risks and
opportunities.
As such, we take voting action against companies in the
TOPIX 100 that fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate-related risks and opportunities, in accordance with
the TCFD framework.
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| Indemnification and Limitations on
Liability |
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Generally, State Street Global
Advisors supports proposals to limit directors’ and statutory auditors’
liability and/or expand indemnification and liability protection up to the
limit provided by law, if he or she has not acted in bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his or her office. We believe limitations and indemnification are
necessary to attract and retain qualified
directors. |
B-65
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Shareholder Rights
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices. |
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a company breaches of any of the criteria above, we may
vote against the Chair of the nominating committee.
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| Accounting and Audit- Related Issues |
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State
Street Global Advisors believes that a company’s auditor is an essential
feature of an effective and transparent system of external supervision.
Shareholders should have the opportunity to vote on the appointment of the
auditor at the annual meeting. |
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| Ratifying
External Auditors |
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We
generally support the appointment of external auditors unless the external
auditor is perceived as being non-independent and there are concerns
about the accounts presented and the audit procedures
followed. |
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| Approval
of Financial Statements |
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We
believe the disclosure and availability of reliable financial statements
in a timely manner is imperative for the investment process. We expect
external auditors to provide assurance of a company’s financial condition.
Hence, we may vote against the approval of financial statements if i) they
have not been disclosed or audited; ii) the auditor opinion is
qualified/adverse, or the auditor has issued a disclaimer of opinion; or
iii) the auditor opinion is not disclosed. |
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| Limiting Legal Liability of External
Auditors |
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We generally oppose limiting the
legal liability of audit firms as we believe this could create a negative
impact on the quality of the audit function. |
B-66
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| Capital
Structure, Reorganization, and Mergers |
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| Unequal Voting Rights |
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State Street Global Advisors
supports the “one-share, one-vote” policy and favors a share
structure where all shares have equal voting rights. We support proposals
to abolish voting caps or multiple voting rights and will oppose measures
to introduce these types of restrictions on shareholder
rights. |
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We generally oppose proposals
authorizing the creation of new classes of common stock with superior
voting rights. We will generally oppose new classes of preferred stock
with unspecified voting, conversion, dividend distribution, and other
rights. In addition, we will not support capitalization changes that add
classes of stock with undefined voting rights or classes that may dilute
the voting interests of existing shareholders. |
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However, we will support capitalization changes that
eliminate other classes of stock and/ or unequal voting
rights. |
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| Share
Capital Increases |
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We
believe pre-emption rights should
be introduced for shareholders. This can provide adequate protection from
excessive dilution due to the issuance of new shares or convertible
securities to third parties or a small number of select
shareholders. |
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| Increase
in Authorized Capital |
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We
generally support increases in authorized capital where the company
provides an adequate explanation for the use of shares. In the absence of
an adequate explanation, we may oppose the request if the increase in
authorized capital exceeds 100 percent of the currently authorized
capital. Where share issuance requests exceed our standard threshold, we
will consider the nature of the specific need, such as mergers,
acquisitions and stock splits. |
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| Dividends |
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We
generally support dividend payouts that constitute 30 percent or more
of net income. We may vote against a dividend payout if the dividend
payout ratio has been consistently below 30 percent without adequate
explanation or if the payout is excessive given the company’s financial
position. Particular attention will be paid where the payment may damage
the company’s long-term financial health. |
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| Share
Repurchase Programs |
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Companies are allowed under Japan Corporate Law to amend
their articles to authorize the repurchase of shares at the board’s
discretion. We will oppose such amendments. We believe the company should
seek shareholder approval for a share repurchase program at each year’s
AGM, providing shareholders the right to evaluate the terms of the
repurchase. |
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We generally support proposals to repurchase shares, unless
the issuer does not clearly state the business purpose for the program, a
definitive number of shares to be repurchased and the timeframe for the
repurchase. We may vote against share repurchase requests that allow share
repurchases during a takeover period.
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| Mergers and Acquisitions |
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Mergers or reorganizing the
structure of a company often involve proposals relating to
reincorporation, restructurings, mergers, liquidations and other major
changes to the corporation. We will support proposals that are in the best
interests of shareholders, demonstrated by enhancing share value or
improving the effectiveness of the company’s operations. In general,
provisions that are deemed to be destructive to shareholders’ rights or
financially detrimental will not be supported. |
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We evaluate mergers and structural
reorganizations on a case-by-case basis. We will
generally support transactions that we believe will maximize shareholder
value. Some of the considerations include, but are not limited to, the
following: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including director and/ or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may vote against a transaction considering the
following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• Offers in which the current market price of the security
exceeds the bid price at the time of voting
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| Anti-Takeover Measures |
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In general, State Street Global
Advisors believes that adoption of poison pills that have been structured
to protect management and to prevent takeover bids from succeeding is not
in shareholders’ interest. A shareholder rights plan may lead to
management entrenchment. It may also discourage legitimate tender offers
and acquisitions. Even if the premium paid to companies with a shareholder
rights plan is higher than that offered to unprotected firms, a company’s
chances of receiving a takeover offer in the first place may be reduced by
the presence of a shareholder rights plan. |
B-68
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Proposals that reduce shareholders’
rights or have the effect of entrenching incumbent management will not be
supported. |
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Proposals that enhance the right of shareholders to make
their own choices as to the desirability of a merger or other proposal are
supported.
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| Shareholder Rights Plans |
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In evaluating the adoption or renewal of a Japanese issuer’s
shareholder rights plans (“poison pill”), we consider the following
conditions: (i) release of proxy circular with details of the
proposal with adequate notice in advance of meeting, (ii) minimum
trigger of over 20 percent, (iii) maximum term of three years,
(iv) sufficient number of independent directors, (v) presence of
an independent committee, (vi) annual election of directors, and
(vii) lack of protective or entrenchment features. Additionally, we
consider the length of time that a shareholder rights plan has been in
effect.
In evaluating an amendment to a shareholder rights plan
(“poison pill”), in addition to the conditions above, we will also
evaluate and consider supporting proposals where the terms of the new plan
are more favorable to shareholders’ ability to accept unsolicited
offers. |
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| “Cross-shareholdings” |
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“Cross-Shareholdings” are a long-standing feature of the
balance sheets of many Japanese companies, but, in our view, can be
detrimental for corporate governance practices and ultimately shareholder
returns.
Therefore, State Street Global Advisors may vote against the
board leader at those TOPIX 500 companies where the “cross-shareholdings”
(strategic listed shares) held by a company exceed 30 percent of the
company’s net assets (as in the securities report disclosed for the
previous fiscal year).
We may waive the guideline if a company engages with State
Street Global Advisors and provides a specific, timebound, and publicly
available plan for reducing its exposure to
“cross-shareholdings”: |
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• To less than 30% by 2025; or |
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• By 50% of current level by 2025
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| Compensation |
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In
Japan, excessive compensation is rarely an issue. Rather, the problem
tends to be the lack of connection between pay and performance. Fixed
salaries and cash retirement bonuses tend to comprise a significant
portion of the compensation structure while performance-based pay is
generally a small portion of the total pay. State Street Global Advisors,
where possible, seeks to encourage the use of performance-based
compensation in Japan as an incentive for executives and as a way to align
interests with shareholders. |
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| Adjustments to Aggregate Compensation Ceiling for
Directors |
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Remuneration for directors in Japan is generally reasonable.
Typically, each company sets the director compensation parameters as an
aggregate, thereby limiting the total pay to all directors. When
requesting a change, a company must disclose the last time the ceiling was
adjusted, and management provides the rationale for the ceiling increase.
We will generally support proposed increases to the ceiling if the company
discloses the rationale for the increase. We may oppose proposals to
increase the ceiling if there has been corporate malfeasance or sustained
poor performance. |
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| Annual
Bonuses for Directors/Statutory Auditors |
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In Japan,
since there are no legal requirements that mandate companies to seek
shareholder approval before awarding a bonus, we believe that existing
shareholder approval of the bonus should be considered best practice. As a
result, we support management proposals on executive compensation where
there is a strong relationship between executive pay and performance over
a five-year period. |
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| Retirement
Bonuses for Directors/Statutory Auditors |
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While many
companies in Japan have abolished the practice where retirement bonuses,
based upon tenure, make up a sizeable portion of directors and auditors’
lifetime compensation, there remain many proposals seeking shareholder
approval for the total amounts paid to directors and statutory auditors as
a whole. In general, we support these payments unless the recipient is an
outsider or in instances where the amount is not disclosed. |
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| Stock
Plans |
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Most
option plans in Japan are conservative, particularly at large companies.
Japanese corporate law requires companies to disclose the monetary value
of the stock options for directors and/or statutory auditors. Some
companies do not disclose the maximum number of options that can be issued
per year and shareholders are unable to evaluate the dilution impact. In
this case, we cannot calculate the dilution level and, therefore, we may
oppose such plans due to poor disclosure. We also oppose plans that allow
for the repricing of options. |
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| Deep
Discount Options |
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As
Japanese companies move away from the retirement bonus system, deep
discount options plans have become more popular. Typically, the exercise
price is set at JPY 1 per share. We evaluate deep discount options using
the same criteria used to evaluate stock options and consider the vesting
period. |
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| Risk Management |
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We believe that risk management is a
key function of the board, which is responsible for setting the overall
risk appetite of a company and for providing oversight on the risk
management process established by senior executives at a company. We allow
boards to have discretion regarding the ways in which they provide
oversight in this area. However, we expect companies to disclose how the
board provides oversight on its risk management system and risk
identification. Boards should also review existing and emerging risks that
evolve in tandem with the changing political and economic landscape or as
companies diversify or expand their operations into new
areas. |
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As responsible stewards, we believe in the importance of
effective risk management and oversight of issues that are material to a
company. To effectively assess the risk of our clients’ portfolios and the
broader market, we expect our portfolio companies to manage risks and
opportunities that are material and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality
disclosure of this process to shareholders.
Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social Issues |
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As a fiduciary, State Street Global Advisors takes a
comprehensive approach to engaging with our portfolio companies about
material environmental and social factors. Our Asset Stewardship program
prioritization process allows us to proactively identify companies for
engagement and voting in order to mitigate sustainability risks in our
portfolio. Through engagement, we aim to build long-term relationships
with the issuers in which we investon behalf of our clients and to address
a broad range of topics relating to the promotion of long-term shareholder
value creation. When voting, we fundamentally consider whether the
adoption of a shareholder proposal addressing an environmental or social
topic material to the company would promote long-term shareholder value in
the context of the company’s existing practices and disclosures as well as
existing market practice.
For more information on our approach to environmental and
social issues, please see our Global Proxy Voting and Engagement
Guidelines for Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| General/Routine |
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Expansion of
Business Activities |
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Japanese companies’ articles of
incorporation strictly define the types of businesses in which a company
is permitted to engage. In general, State Street Global Advisors views
proposals that expand and diversify the company’s business activities as
routine and non-contentious. We
will monitor instances in which there has been an inappropriate
acquisition and diversification away from the company’s main area of
competence that resulted in a decrease of shareholder
value. |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. And, as pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth-largest asset manager* with US $3.48
trillion† under our
care. |
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* Pensions & Investments
Research Center, as of December 31, 2021. |
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† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
B-72
ssga.com
Marketing communications
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Canada: State Street Global Advisors, Ltd.,
1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400
and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775
5900. France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France.
T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State
Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment
Trust Association, Japan, Japan Securities Dealers’ Association.
Netherlands: State Street Global Advisors Netherlands, Apollo Building
7th floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181
000. State Street Global Advisors Netherlands is a branch office of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State
Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
B-73
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty
as to the current accuracy, reliability or completeness of, nor
liability for, decisions based on such information and it should not be relied
on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the
scoring model is based on sustainability and corporate governance
dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1482398-3479913.3.1.GBL.RTL 0323
Exp. Date: 03/31/2024
B-74
March 2023
North America (United States & Canada)
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for North
America outline our approach to voting and engaging with companies listed on
stock exchanges in the United States and Canada. These Guidelines complement and
should be read in conjunction with State Street Global Advisors’ Global Proxy
Voting and Engagement Principles, which outline our overall approach to voting
and engaging with companies, and State Street Global Advisors’ Conflicts
Mitigation Guidelines, which provide information about managing the conflicts of
interests that may arise through State Street Global Advisors’ proxy voting and
engagement activities.
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These Proxy Voting and Engagement
Guidelines (the “Guidelines”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Global Proxy Voting and Engagement Principles; however, State Street
Global Advisors also endeavors to show sensitivity to local market
practices when voting in these various markets.
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State Street Global Advisors’ Proxy
Voting and Engagement Guidelines for North America (United States [“US”]
and Canada) address our market-specific approaches to topics including
directors and boards, accounting and audit related issues, capital
structure, reorganization and mergers, compensation, and other
governance-related issues. |
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When voting and engaging with
companies in global markets, we consider market-specific nuances in the
manner that we believe will most likely protect and promote the long-term
economic value of client investments. We expect companies to observe the
relevant laws and regulations of their respective markets, as well as
country specific best practice guidelines and corporate governance codes.
We may hold companies in some markets to our global standards when we feel
that a country’s regulatory requirements do not address some of the key
philosophical principles that we believe are fundamental to our global
voting principles. |
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In our
analysis and research into corporate governance issues in North America,
we expect all companies to act in a transparent manner and to provide
detailed disclosure on board profiles, related-party transactions,
executive compensation, and other governance issues that impact
shareholders’ long-term interests. Further, as a founding member of the
Investor Stewardship Group (“ISG”), we proactively monitor companies’
adherence to the Corporate Governance Principles for US listed companies
(the “Principles”). Consistent with the “comply-or-explain” expectations
established by the Principles, we encourage companies to proactively
disclose their level of compliance with the Principles. In instances of
non-compliance, and when
companies cannot explain the nuances of their governance structure
effectively, either publicly or through engagement, we may vote against
the independent board leader. |
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy |
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In our view, corporate governance
and sustainability issues are an integral part of the investment process.
The Asset Stewardship Team consists of investment professionals with
expertise in corporate governance, remuneration, accounting, and
environmental and social issues. We have established robust corporate
governance principles and practices that are backed with extensive
analytical expertise to understand the complexities of the corporate
governance landscape. We engage with companies to provide insight on the
principles and practices that drive our voting decisions. We also conduct
proactive engagements to address significant shareholder concerns and
issues in a manner consistent with maximizing shareholder
value. |
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The
team works alongside members of State Street Global Advisors’ Active
Fundamental and various other investment teams, collaborating on issuer
engagements and providing input on company-specific
fundamentals. |
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| Directors and Boards |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
In order to carry out their primary responsibilities, directors have to
undertake activities that range from setting strategy and providing
guidance on strategic matters, overseeing executive management, to
selecting the CEO and other senior executives, creating a succession plan
for the board and management, and providing effective risk oversight,
including of risks related to sustainability issues. Further, good
corporate governance necessitates the existence of effective internal
controls and risk management systems, which should be governed by the
board. |
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State Street Global Advisors
believes that a well-constituted board of directors, with a balance of
skills, expertise, and independence, provides the foundations for a
well-governed company. We view board quality as a measure of director
independence, director succession planning, board diversity, evaluations
and refreshment, and company governance practices. We vote for the (re-)election of directors on a case-by-case basis after
considering various factors, including board quality, general market
practice, and availability of information on director skills and
expertise. |
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In our analysis of boards, we
consider whether board members have adequate skills to provide effective
oversight of corporate strategy, operations, and risks, including
environmental and social issues. Boards should also have a regular
evaluation process in place to assess the effectiveness of the board and
the skills of board members to address issues, such as emerging risks,
changes to corporate strategy, and diversification of operations and
geographic footprint. |
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In principle, we believe independent
directors are crucial to robust corporate governance and help management
establish sound corporate governance policies and practices. We believe a
sufficiently independent board will most effectively monitor management
and perform oversight functions necessary to protect shareholder
interests. |
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Director-related proposals include issues submitted to
shareholders that deal with the composition of the board or with members
of a corporation’s board of directors. In deciding the director nominee to
support, we consider numerous factors. |
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| Director Elections |
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Our director election guideline
focuses on companies’ governance profile to identify if a company
demonstrates appropriate governance practices or if it exhibits negative
governance practices. Factors we consider when evaluating governance
practices include, but are not limited to the following: |
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• Shareholder rights |
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• Board independence |
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• Board
structure |
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If a company demonstrates
appropriate governance practices, we believe a director should be
classified as independent based upon the relevant listing standards or
local market practice standards. In such cases, the composition of the key
oversight committees of a board should meet the minimum standards of
independence. Accordingly, we may vote against a nominee at a company with
appropriate governance practices if the director is classified as non-independent under relevant listing
standards or local market practice and serves on a key committee of the
board (compensation, audit, nominating, or committees required to be fully
independent by local market standards). |
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Conversely, if a company
demonstrates negative governance practices, State Street Global Advisors
believes the classification standards for director independence should be
elevated. In such circumstances, we will evaluate all director nominees
based upon the following classification standards: |
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• Is the nominee an employee of or related to an employee
of the issuer or its auditor? |
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• Does the nominee provide professional services to the
issuer? |
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• Has the nominee attended an appropriate number of board
meetings? |
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• Has the nominee received non-board related compensation from the
issuer? |
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In the US market where companies
demonstrate negative governance practices, these stricter standards will
apply not only to directors who are a member of a key committee but to all
directors on the board as market practice permits. Accordingly, we may
vote against a nominee (with the exception of the CEO) where the board has
inappropriate governance practices and is considered not independent based
on the above independence criteria. |
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Additionally, we may withhold votes
from directors based on the following: |
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• Overall average board tenure is excessive. In assessing
excessive tenure, we consider factors such as the preponderance of long
tenured directors, board refreshment practices, and classified board
structures |
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• Directors attend less than 75 percent of board
meetings without appropriate explanation or providing reason for their
failure to meet the attendance threshold |
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• Directors of companies that have not been responsive to a
shareholder proposal that received a majority shareholder support at the
last annual or special meeting |
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• Consideration can be warranted if management submits the
proposal(s) on the ballot as a binding management proposal, recommending
shareholders vote for the particular
proposal(s) |
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• Directors of companies have unilaterally adopted/ amended
company bylaws that negatively impact our shareholder rights (such as
fee-shifting, forum selection,
and exclusion service bylaws) without putting such amendments to a
shareholder vote |
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• Compensation committee members where there is a weak
relationship between executive pay and performance over a five-year
period |
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• Audit committee members if non-audit fees exceed 50 percent
of total fees paid to the auditors |
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• Directors who appear to have been remiss in their
duties |
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Board Gender
Diversity |
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We expect boards of all listed
companies to have at least one female board member and the boards of
Russell 3000 companies to be composed of at least 30 percent women
directors. If a company does not meet the applicable expectation, State
Street Global Advisors may vote against the Chair of the board’s
nominating committee or the board leader in the absence of a nominating
committee. Additionally, if a company does not meet the applicable
expectation for three consecutive years, State Street Global Advisors may
vote against all incumbent members of the nominating committee or those
persons deemed responsible for the nomination process. |
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We may waive this voting guideline
if a company engages with State Street Global Advisors and provides a
specific, timebound plan for either reaching the 30-percent threshold (Russell 3000) or
for adding a woman director (non-Russell 3000). |
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Board Racial/Ethnic
Diversity |
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We believe effective board oversight
of a company’s long-term business strategy necessitates a diversity of
perspectives, especially in terms of gender, race and ethnicity. If a
company in the Russell 1000 does not disclose, at minimum, the gender,
racial and ethnic composition of its board, we may vote against the Chair
of the nominating committee. We may withhold support from the Chair of the
nominating committee also when a company in the S&P 500 does not have
at least one director from an underrepresented racial/ethnic community on
its board. |
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Workforce
Diversity |
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We may vote against the Chair of the
compensation committee at companies in the S&P 500 that do not
disclose their EEO-1 reports.
Acceptable disclosures include: |
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• The original EEO-1 report response |
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• The exact content of the report translated into custom
graphics |
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Director Time
Commitments |
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When voting on the election or re-election of a director, we also
consider the number of outside board directorships that a non-executive and an executive may
undertake. Thus, State Street Global Advisors may take voting action
against a director who exceeds the number of board mandates listed
below: |
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Director nominees who sit on more than four public
company boards |
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For non-executive board chairs/lead
independent directors and director nominees who hold excessive
commitments, as defined above, we may consider waiving our policy and vote
in support of a director if a company discloses its director commitment
policy in a publicly available manner (e.g., corporate governance
guidelines, proxy statement, company website). This policy or associated
disclosure must include: |
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• A numerical limit on public company board seats a
director can serve on |
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– This limit cannot exceed our policy by more than one
seat |
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• Consideration of public company board leadership
positions (e.g., Committee Chair) |
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• Affirmation that all directors are currently compliant
with the company policy |
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• Description of an annual policy review process undertaken
by the Nominating Committee to evaluate outside director time
commitments |
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If a director is imminently leaving
a board and this departure is disclosed in a written, time-bound and
publicly-available manner, we may consider waiving our withhold vote when
evaluating the director for excessive time commitments. |
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Service on a mutual fund board, the
board of a UK investment trust or a Special Purpose Acquisition Company
(SPAC) board is not considered when evaluating directors for excessive
commitments. However, we do expect these roles to be considered by
nominating committees when evaluating director time
commitments. |
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Climate-related
Disclosures |
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State Street Global Advisors finds
that the recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) provide the most effective framework for disclosure of
climate-related risks and opportunities. |
B-80
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As
such, we may take voting action against companies in the S&P 500 and
S&P/TSX Composite that fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate-related risks and opportunities, in accordance with
the TCFD framework. |
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| Director-Related Proposals |
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We generally vote for the following
director-related proposals: |
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• Discharge of board members’ duties, in the absence of
pending litigation, regulatory investigation, charges of fraud, or other
indications of significant concern |
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• Proposals to restore shareholders’ ability in order to
remove directors with or without cause |
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• Proposals that permit shareholders to elect directors to
fill board vacancies |
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• Shareholder proposals seeking disclosure regarding the
company, board, or compensation committee’s use of compensation
consultants, such as company name, business relationship(s), and fees
paid |
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We generally vote against the
following director-related proposals: |
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• Requirements that candidates for directorships own large
amounts of stock before being eligible to be elected |
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• Proposals that relate to the “transaction of other
business as properly comes before the meeting,” which extend “blank check”
powers to those acting as proxy |
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• Proposals requiring two candidates per board
seat |
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| Majority Voting |
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We will generally support a majority
vote standard based on votes cast for the election of
directors. |
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We will
generally vote to support amendments to bylaws that would require simple
majority of voting shares (i.e. shares cast) to pass or to repeal certain
provisions. |
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| Annual
Elections |
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We
generally support the establishment of annual elections of the board of
directors. Consideration is given to the overall level of board
independence and the independence of the key committees, as well as the
existence of a shareholder rights plan. |
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| Cumulative
Voting |
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We do
not support cumulative voting structures for the election of
directors. |
B-81
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| Separation Chair/CEO |
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We analyze proposals for the
separation of Chair/CEO on a case-by-case basis taking into
consideration numerous factors, including the appointment of and role
played by a lead director, a company’s performance, and the overall
governance structure of the company. |
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However, we may take voting action against the chair or
members of the nominating committee at S&P 500 companies that have
combined the roles of chair and CEO and have not appointed a lead
independent director. |
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| Proxy
Access |
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In
general, we believe that proxy access is a fundamental right and an
accountability mechanism for all long-term shareholders. We will consider
proposals relating to proxy access on a case-by-case basis. We will
support shareholder proposals that set parameters to empower long-term
shareholders while providing management the flexibility to design a
process that is appropriate for the company’s circumstances. |
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We will review the terms of all
other proposals and will support those proposals that have been introduced
in the spirit of enhancing shareholder rights. |
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Considerations include the following:
• The ownership thresholds and holding duration proposed in
the resolution
• The binding nature of the proposal
• The number of directors that shareholders may be able to
nominate each year
• Company governance structure
• Shareholder rights
• Board performance
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| Age/Term
Limits |
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Generally, we may vote against age and term limits unless
the company is found to have poor board refreshment and director
succession practices, and has a preponderance of non-executive directors with
excessively long tenures serving on the board. |
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| Approve
Remuneration of Directors |
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Generally, we will support directors’ compensation, provided
the amounts are not excessive relative to other issuers in the market or
industry. In making our determination, we review whether the compensation
is overly dilutive to existing shareholders. |
B-82
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| Indemnification |
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Generally, we support proposals to limit directors’
liability and/or expand indemnification and liability protection if he or
she has not acted in bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his or her office. |
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| Classified
Boards |
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We
generally support annual elections for the board of
directors. |
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| Confidential Voting |
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We will
support confidential voting. |
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| Board
Size |
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We will
support proposals seeking to fix the board size or designate a range for
the board size and will vote against proposals that give management the
ability to alter the size of the board outside of a specified range
without shareholder approval. |
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| Board
Responsiveness |
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We may
vote against the re-election of
members of the compensation committee if we have serious concerns about
remuneration practices and if the company has not been responsive to
shareholder pressure to review its approach. In addition, if the level of
dissent against a management proposal on executive pay is consistently
high, and we have determined that a vote against a pay-related proposal is warranted in
the third consecutive year, we may vote against the Chair of the
compensation committee. |
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| Shareholder Rights |
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices. |
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
B-83
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a
company breaches of any of the criteria above, we may vote against the
Chair of the nominating committee. |
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Accounting and
Audit-Related Issues |
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| Ratifying Auditors and Approving
Auditor Compensation |
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We support the approval of auditors
and auditor compensation provided that the issuer has properly disclosed
audit and non-audit fees relative
to market practice and the audit fees are not deemed excessive. We deem
audit fees to be excessive if the non-audit fees for the prior year
constituted 50 percent or more of the total fees paid to the auditor.
We will also support the disclosure of auditor and consulting
relationships when the same or related entities are conducting both
activities and will support the establishment of a selection committee
responsible for the final approval of significant management consultant
contract awards where existing firms are already acting in an auditing
function. |
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In circumstances where “other” fees
include fees related to initial public offerings, bankruptcy emergence,
and spin-offs, and the company makes public disclosure of the amount and
nature of those fees which are determined to be an exception to the
standard “non-audit fee”
category, then such fees may be excluded from the non-audit fees considered in
determining the ratio of non-audit to audit/audit-related
fees/tax compliance and preparation for purposes of determining whether
non-audit fees are
excessive. |
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We will support the discharge of
auditors and requirements that auditors attend the annual meeting of
shareholders. |
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Approval of Financial
Statements |
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We believe the disclosure and availability of
reliable financial statements in a timely manner is imperative for the
investment process. We expect external auditors to provide assurance of a
company’s financial condition. Hence, we may vote against the approval of
financial statements if i) they have not been disclosed or audited; ii)
the auditor opinion is qualified/adverse, or the auditor has issued a
disclaimer of opinion; or iii) the auditor opinion is not
disclosed. |
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| Capital Structure |
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Capital structure proposals include
requests by management for approval of amendments to the certificate of
incorporation that will alter the capital structure of the
company. |
B-84
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The
most common request is for an increase in the number of authorized shares
of common stock, usually in conjunction with a stock split or dividend.
Typically, we support requests that are not unreasonably dilutive or
enhance the rights of common shareholders. In considering authorized share
proposals, the typical threshold for approval is 100percent over current
authorized shares. However, the threshold may be increased if the company
offers a specific need or purpose (merger, stock splits, growth purposes,
etc.). All proposals are evaluated on a case-by-case basis taking into
account the company’s specific financial situation. |
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| Increase
in Authorized Common Shares |
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In
general, we support share increases for general corporate purposes up to
100 percent of current authorized stock. |
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We support increases for specific corporate purposes up to
100 percent of the specific need plus 50 percent of current
authorized common stock for US and Canadian firms.
When applying the thresholds, we will also consider the
nature of the specific need, such as mergers and acquisitions and stock
splits. |
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| Increase
in Authorized Preferred Shares |
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We vote on
a case-by-case basis on proposals
to increase the number of preferred shares. |
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Generally, we will vote for the authorization of preferred
stock in cases where the company specifies the voting, dividend,
conversion, and other rights of such stock and the terms of the preferred
stock appear reasonable. |
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We will
support proposals to create “declawed” blank check preferred stock (stock
that cannot be used as a takeover defense). However, we may vote against
proposals to increase the number of blank check preferred stock authorized
for issuance when no shares have been issued or reserved for a specific
purpose. |
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| Unequal Voting Rights |
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We will not support proposals
authorizing the creation of new classes of common stock with superior
voting rights and may vote against new classes of preferred stock with
unspecified voting, conversion, dividend distribution, and other rights.
In addition, we will not support capitalization changes that add “blank
check” classes of stock (i.e. classes of stock with undefined voting
rights) or classes that dilute the voting interests of existing
shareholders. |
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However, we will support capitalization changes that
eliminate other classes of stock and/ or unequal voting
rights. |
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Reorganization
and Mergers |
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The
reorganization of the structure of a company or mergers often involve
proposals relating to reincorporation, restructurings, liquidations, and
other major changes to the corporation. |
B-85
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Proposals that are in the best interests of the
shareholders, demonstrated by enhancing share value or improving the
effectiveness of the company’s operations, will be supported. |
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In
general, provisions that are not viewed as economically sound or are
thought to be destructive to shareholders’ rights are not
supported. |
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We will
generally support transactions that maximize shareholder value. Some of
the considerations include the following: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including, director and/ or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may
vote against a transaction considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock, especially in some non-US markets |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting |
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| Anti-Takeover Issues |
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Typically, these are proposals relating to requests by
management to amend the certificate of incorporation or bylaws to add or
to delete a provision that is deemed to have an anti-takeover effect. The
majority of these proposals deal with management’s attempt to add some
provision that makes a hostile takeover more difficult or will protect
incumbent management in the event of a change in control of the
company. |
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Proposals that reduce shareholders’ rights or have the
effect of entrenching incumbent management may not be
supported. |
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Proposals that enhance the right of shareholders to make
their own choices as to the desirability of a merger or other proposal are
supported. |
B-86
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| Shareholder Rights Plans |
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US: We will support mandates
requiring shareholder approval of a shareholder rights plans (“poison
pill”) and repeals of various anti-takeover related
provisions. |
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In
general, we may vote against the adoption or renewal of a US issuer’s
shareholder rights plan (“poison pill”). |
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We will
vote for an amendment to a shareholder rights plan (“poison pill”) where
the terms of the new plans are more favorable to shareholders’ ability to
accept unsolicited offers (i.e. if one of the following conditions are
met: (i) minimum trigger, flip-in or flip-over of
20 percent, (ii) maximum term of three years, (iii) no
“dead hand,” “slow hand,” “no hand” nor similar feature that limits the
ability of a future board to redeem the pill, and (iv) inclusion of a
shareholder redemption feature (qualifying offer clause), permitting ten
percent of the shares to call a special meeting or seek a written consent
to vote on rescinding the pill if the board refuses to redeem the pill 90
days after a qualifying offer is announced). |
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Canada: We analyze proposals for shareholder approval
of a shareholder rights plan (“poison pill”) on a case-by-case basis taking into
consideration numerous factors, including but not limited to, whether it
conforms to ‘new generation’ rights plans and the scope of the
plan. |
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| Special
Meetings |
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We will
vote for shareholder proposals related to special meetings at companies
that do not provide shareholders the right to call for a special meeting
in their bylaws if: |
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• The company also does not allow shareholders to act by
written consent |
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• The company allows shareholders to act by written consent
but the ownership threshold for acting by written consent is set above
25 percent of outstanding shares |
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We will
vote for shareholder proposals related to special meetings at companies
that give shareholders (with a minimum 10 percent ownership
threshold) the right to call for a special meeting in their bylaws
if: |
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• The current ownership threshold to call for a special
meeting is above 25 percent of outstanding shares |
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We will
vote for management proposals related to special meetings. |
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| Written
Consent |
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We will
vote for shareholder proposals on written consent at companies
if: |
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• The company does not have provisions in their bylaws
giving shareholders the right to call for a special
meeting |
B-87
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• The company allows shareholders the right to call for a
special meeting, but the current ownership threshold to call for a special
meeting is above 25percent of outstanding shares |
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• The company has a poor governance
profile |
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We will
vote management proposals on written consent on a case-by-case basis. |
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| Super-Majority |
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We will
generally vote against amendments to bylaws requiring super-majority
shareholder votes to pass or repeal certain provisions. We will vote for
the reduction or elimination of super-majority vote requirements, unless
management of the issuer was concurrently seeking to or had previously
made such a reduction or elimination. |
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| Compensation |
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Despite
the differences among the types of plans and the awards possible there is
a simple underlying philosophy that guides the analysis of all
compensation plans; namely, the terms of the plan should be designed to
provide an incentive for executives and/or employees to align their
interests with those of the shareholders and thus work toward enhancing
shareholder value. Plans that benefit participants only when the
shareholders also benefit are those most likely to be
supported. |
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| Advisory Vote on Executive Compensation
and Frequency |
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State Street Global Advisors
believes executive compensation plays a critical role in aligning
executives’ interest with shareholders’, attracting, retaining and
incentivizing key talent, and ensuring positive correlation between the
performance achieved by management and the benefits derived by
shareholders. We support management proposals on executive compensation
where there is a strong relationship between executive pay and performance
over a five-year period. We seek adequate disclosure of various
compensation elements, absolute and relative pay levels, peer selection
and benchmarking, the mix of long-term and short-term incentives,
alignment of pay structures with shareholder interests as well as with
corporate strategy, and performance. Further shareholders should have the
opportunity to assess whether pay structures and levels are aligned with
business performance on an annual basis. |
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In Canada, where advisory votes on
executive compensation are not commonplace, we will rely primarily upon
engagement to evaluate compensation plans. |
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Employee Equity
Award
Plans |
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We consider numerous criteria when
examining equity award proposals. Generally we do not vote against plans
for lack of performance or vesting criteria. Rather the main criteria that
will result in a vote against an equity award plan
are: |
B-88
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Excessive voting power dilution
To assess the dilutive effect, we divide the number of shares required
to fully fund the proposed plan, the number of authorized but unissued
shares and the issued but unexercised shares by the fully diluted share
count. We review that number in light of certain factors, such as the
industry of the issuer. |
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Historical option grants
Excessive historical option grants over the past three years. Plans
that provide for historical grant patterns of greater than five to eight
percent are generally not supported. |
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Repricing We may vote against
any plan where repricing is expressly permitted. If a company has a
history of repricing underwater options, the plan will not be
supported. |
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Other criteria include the
following: |
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• Number of participants or eligible
employees |
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• The variety of awards possible |
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• The period of time covered by the plan |
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There are numerous factors that we
view as negative. If combined they may result in a vote against a
proposal. Factors include: |
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• Grants to individuals or very small groups of
participants |
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• “Gun-jumping”
grants which anticipate shareholder approval of a plan or
amendment |
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• The power of the board to exchange “underwater” options
without shareholder approval. This pertains to the ability of a company to
reprice options, not the actual act of repricing described
above |
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• Below market rate loans to officers to exercise their
options |
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• The ability to grant options at less than fair market
value; |
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• Acceleration of vesting automatically upon a change in
control |
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• Excessive compensation (i.e. compensation plans which we
deem to be overly dilutive) |
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Share Repurchases If a
company makes a clear connection between a share repurchase program and
its intent to offset dilution created from option plans and the company
fully discloses the amount of shares being repurchased, the voting
dilution calculation may be adjusted to account for the impact of the buy
back. |
B-89
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Companies will not have any such
repurchase plan factored into the dilution calculation if they do not
(i) clearly state the intentions of any proposed share buy-back plan, (ii) disclose a
definitive number of the shares to be bought back, (iii) specify the
range of premium/discount to market price at which a company can
repurchase shares, and (iv) disclose the time frame during which the
shares will be bought back. |
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162(m) Plan Amendments If a plan would not normally
meet our criteria described above, but was primarily amended to add
specific performance criteria to be used with awards that were designed to
qualify for performance-based exception from the tax deductibility
limitations of Section 162(m) of the Internal Revenue Code, then we
will support the proposal to amend the plan. |
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| Employee
Stock Option Plans |
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We
generally vote for stock purchase plans with an exercise price of not less
than 85 percent of fair market value. However, we take market
practice into consideration. |
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| Compensation-Related Items |
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We generally support the following
proposals: |
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• Expansions to reporting of financial or
compensation-related information within reason |
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• Proposals requiring the disclosure of executive
retirement benefits if the issuer does not have an independent
compensation committee |
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We generally vote against the
following proposal: |
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• Retirement bonuses for non-executive directors and
auditors |
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Miscellaneous/
Routine Items |
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We generally support the following
miscellaneous/routine governance items: |
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• Reimbursement of all appropriate proxy solicitation
expenses associated with the election when voting in conjunction with
support of a dissident slate |
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• Opting-out of
business combination provision |
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• Proposals that remove restrictions on the right of
shareholders to act independently of management |
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• Liquidation of the company if the company will file for
bankruptcy if the proposal is not approved |
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• Shareholder proposals to put option repricings to a
shareholder vote |
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• General updating of, or corrective amendments to, charter
and bylaws not otherwise specifically addressed herein, unless such
amendments would reasonably be expected to diminish shareholder rights
(e.g. extension of directors’ term limits, amending shareholder vote
requirement to amend the charter documents, insufficient information
provided as to the reason behind the
amendment) |
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• Change in corporation name |
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• Mandates that amendments to bylaws or charters have
shareholder approval |
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• Management proposals to change the date, time, and/or
location of the annual meeting unless the proposed change is
unreasonable
• Repeals, prohibitions or adoption of anti-greenmail
provisions
• Management proposals to implement a reverse stock split
when the number of authorized shares will be proportionately reduced and
proposals to implement a reverse stock split to avoid
delisting |
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• Exclusive forum provisions |
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State Street Global Advisors
generally does not support the following miscellaneous/ routine governance
items: |
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• Proposals requesting companies to adopt full tenure
holding periods for their executives |
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• Reincorporation to a location that we believe has more
negative attributes than its current location of
incorporation |
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• Shareholder proposals to change the date, time, and/or
location of the annual meeting unless the current scheduling or location
is unreasonable |
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• Proposals to approve other business when it appears as a
voting item |
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• Proposals giving the board exclusive authority to amend
the bylaws |
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• Proposals to reduce quorum requirements for shareholder
meetings below a majority of the shares outstanding unless there are
compelling reasons to support the proposal |
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| Risk Management |
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We believe that risk management is a
key function of the board, which is responsible for setting the overall
risk appetite of a company and for providing oversight on the risk
management process established by senior executives at a company. We allow
boards to have discretion regarding the ways in which they provide
oversight in this area. However, we expect companies to disclose how the
board provides oversight on its risk management system and risk
identification. Boards should also review existing and emerging risks that
evolve in tandem with the changing political and economic landscape or as
companies diversify or expand their operations into new
areas. |
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As responsible stewards, we believe
in the importance of effective risk management and oversight of issues
that are material to a company. To effectively assess the risk of our
clients’ portfolios and the broader market, we expect our portfolio
companies to manage risks and opportunities that
are |
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material and industry-specific and that have a demonstrated
link to long-term value creation, and to provide high-quality disclosure
of this process to shareholders.
Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social
Issues |
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As a fiduciary, State Street Global
Advisors takes a comprehensive approach to engaging with our portfolio
companies about material environmental and social factors. Our Asset
Stewardship program prioritization process allows us to proactively
identify companies for engagement and voting in order to mitigate
sustainability risks in our portfolio. Through engagement, we aim to build
long-term relationships with the issuers in which we invest on behalf of
our clients and to address a broad range of topics relating to the
promotion of long-term shareholder value creation. When voting, we
fundamentally consider whether the adoption of a shareholder proposal
addressing an environmental or social topic material to the company would
promote long-term shareholder value in the context of the company’s
existing practices and disclosures as well as existing market
practice. |
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For
more information on our approach to environmental and social issues,
please see our Global Proxy Voting and Engagement Guidelines for
Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| About
State Street Global Advisors |
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For four decades, State Street Global
Advisors has served the world’s governments, institutions and financial
advisors. With a rigorous, risk-aware approach built on research, analysis
and market-tested experience, we build from a breadth of index and active
strategies to create cost-effective solutions. And, as pioneers in index,
ETF, and ESG investing, we are always inventing new ways to invest. As a
result, we have become the world’s fourth-largest asset manager* with US
$3.48 trillion† under our
care. |
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* Pensions & Investments Research Center, as of
December 31, 2021.
† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
B-92
ssga.com
Marketing communications
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2
245 9000. Australia: State Street Global Advisors, Australia, Limited
(ABN 42 003 914 225) is the holder of an Australian Financial Services License
(AFSL Number 238276). Registered office: Level 14, 420 George Street,
Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612 9240-7611.
Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 185,
1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium
is a branch office of State Street Global Advisors Europe Limited, registered in
Ireland with company
number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. Canada: State Street Global Advisors, Ltd., 1981 McGill College
Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide
Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France.
T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Hong Kong: State Street Global Advisors Asia
Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global
Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934.
T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global
Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is
a branch of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. State Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment
Trust Association, Japan, Japan Securities Dealers’ Association.
Netherlands: State Street Global Advisors Netherlands, Apollo Building
7th floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181
000. State Street Global Advisors Netherlands is a branch office of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State
Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00.
F: +41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered office:
20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395
6350. United States: State Street Global Advisors, 1 Iron Street, Boston,
MA 02210-1641. T: +1 617 786 3000.
B-93
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based
on such information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio
investing in industry sectors or securities which underperform the
market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by
the appropriate EU regulator who are deemed both knowledgeable and
experienced in matters relating to investments. The products and services to
which this communication relates are only available to such persons and persons
of any other description (including retail clients) should not rely on this
communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in
Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation.
This means that this marketing communication (a) has not been prepared in
accordance with legal requirements designed to promote the independence of
investment research (b) is not subject to any prohibition on dealing ahead
of the dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved. ID1482705-3479916.3.1.GBL.RTL 0323
Exp. Date: 03/31/2024
B-94
March 2023
Rest of the World
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for the Rest
of the World outline our approach to voting and engaging with companies listed
on stock exchanges in international markets not covered under specific
country/regional Guidelines. These Guidelines complement and should be read in
conjunction with State Street Global Advisors’ Global Proxy Voting and
Engagement Principles, which outline our overall approach to voting and engaging
with companies, and State Street Global Advisors’ Conflicts Mitigation
Guidelines, which provide information about managing the conflicts of interests
that may arise through State Street Global Advisors’ proxy voting and engagement
activities.
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These Proxy Voting and Engagement
Guidelines (the “Guidelines”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Global Proxy Voting and Engagement Principles; however, State Street
Global Advisors also endeavors to show sensitivity to local market
practices when voting in these various markets.
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At State Street Global Advisors, we
recognize that markets not covered under specific country/regional
guidelines, specifically emerging markets, are disparate in their
corporate governance frameworks and practices. While they tend to pose
broad common governance issues, such as concentrated ownership, poor
disclosure of financial and related-party transactions, and weak
enforcement of rules and regulation, our Guidelines are designed to
identify and to address specific governance concerns across the markets.
We also evaluate the various factors that contribute to the corporate
governance framework of a country. These factors include, but are not
limited to: (i) the macroeconomic conditions and broader political
system in a country; (ii) quality of regulatory oversight,
enforcement of property and shareholder rights; and (iii) the
independence of judiciary. |
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When voting and engaging with
companies in global markets, we consider market-specific nuances in the
manner that we believe will most likely protect and promote the long-term
economic value of client investments. We expect all companies to observe
the relevant laws and regulations of their respective markets, as well as
any country-specific best practice guidelines and corporate governance
codes. We may hold companies in some markets to our global standards when
we feel that a country’s regulatory requirements do not address some of
the key philosophical principles that we believe are fundamental to our
global voting principles. |
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State
Street Global Advisors’ Proxy Voting and Engagement Guidelines for the
Rest of the World address our approaches to topics including directors and
boards, accounting and audit-related issues, capital structure,
reorganization and mergers, remuneration, and other governance-related
issues. |
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy in Emerging Markets |
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State Street Global Advisors’
approach to proxy voting and issuer engagement in emerging markets is
designed to increase the value of our clients’ investments through the
mitigation of governance risks. The overall quality of the corporate
governance framework in an emerging market country drives the level of
governance risks investors assign to a country. Thus, improving the macro
governance framework in a country may help to reduce governance risks and
to increase the overall value of our clients’ holdings over time. In order
to improve the overall governance framework and practices in a country,
members of our Asset Stewardship Team endeavor to engage with
representatives from regulatory agencies and stock markets to highlight
potential concerns with the macro governance framework of a country. To
help mitigate company-specific risk, the State Street Global Advisors
Asset Stewardship Team works alongside members of the Active Fundamental
and emerging market specialists to engage with emerging market companies
on governance issues and address any specific concerns, or to get more
information regarding shareholder items that are to be voted on at
upcoming shareholder meetings. This integrated approach to engagement
drives our proxy voting and engagement philosophy in emerging
markets. |
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| Directors and Boards |
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Principally, a board acts on behalf
of shareholders by protecting their interests and preserving their rights.
In order to carry out their primary responsibilities, directors have to
undertake activities that range from setting strategy and providing
guidance on strategic matters, overseeing executive management, to
selecting the CEO and other senior executives, creating a succession plan
for the board and management, and providing risk oversight, including of
risks related to sustainability issues. Further, we believe good corporate
governance necessitates the existence of effective internal controls and
risk management systems, which should be governed by the
board. |
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We
believe that a well-constituted board of directors, with a good balance of
skills, expertise and independence, provides the foundation for a
well-governed company. However, several factors, such as low overall
independence level requirements by market regulators, poor biographical
disclosure of director profiles, prevalence of related-party transactions,
and the general resistance from controlling shareholders to increase board
independence, render the election of directors as one of the most
important fiduciary duties we perform in emerging market
companies. |
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| Board Independence |
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We vote for the (re-)election of directors on a case-by-case basis after
considering various factors, including board quality, general market
practice and availability of information on director skills and expertise.
We expect companies to meet minimum overall board independence standards,
as defined in a local corporate governance code or market practice.
Therefore, in several countries, we may vote against certain non-independent directors if overall
board independence levels do not meet market standards. |
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Our broad criteria for director
independence in emerging market companies include factors such
as: |
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• Participation in related-party
transactions |
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• Employment history with company |
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• Relations with controlling shareholders and
employees |
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• Company classification of a director as non-independent |
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| Board Committees |
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In some countries, market practice
calls for the establishment of a board level audit committee. We believe
an audit committee should be responsible for monitoring the integrity of
the financial statements of a company and appointing external auditors. It
should also monitor their qualifications, independence, effectiveness and
resource levels. Based upon our desire to enhance the quality of financial
and accounting oversight provided by independent directors, we expect that
listed companies have an audit committee constituted of a majority of
independent directors. |
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| Board Gender Diversity |
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We expect boards of listed companies
in all markets and indices to have at least one female board member. If a
company does not meet this expectation, State Street Global Advisors may
vote against the Chair of the board’s nominating committee or the board
leader in the absence of a nominating committee. Additionally, if a
company does not meet this expectation for three consecutive years, State
Street Global Advisors may vote against all incumbent members of the
nominating committee or those persons deemed responsible for the
nomination process. |
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We may
waive this voting guideline if a company engages with State Street Global
Advisors and provides a specific, timebound plan for adding at least one
woman to its board. |
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| Board
Responsiveness to High Dissent against Pay Proposals |
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Poorly
structured executive compensation plans pose increasing reputational risk
to companies. Ongoing high level of dissent against a company’s
compensation proposals may indicate that the company is not receptive to
investor concerns. If the level of dissent against a company’s
remuneration report and/or remuneration policy is consistently high, and
we have determined that a vote against a pay-related proposal is warranted in
the third consecutive year, we may vote against the Chair of the
remuneration committee. |
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| Climate-related Disclosures |
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State Street Global Advisors finds
that the recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) provide the most effective framework for disclosure of
climate-related risks and opportunities. |
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As
such, we may take voting action against companies in the Hang Seng and
Straits Times that fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate-related risks and opportunities, in accordance with
the TCFD framework. |
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Shareholder Rights
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices. |
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a
company breaches of any of the criteria above, we may vote against the
Chair of the nominating committee. |
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| Accounting and Audit-Related Issues |
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The
disclosure and availability of reliable financial statements in a timely
manner is imperative for the investment process. As a result, board
oversight of internal controls and the independence of the audit process
are essential if investors are to rely upon financial statements. We
believe that audit committees provide the necessary oversight for the
selection and appointment of auditors, the company’s internal controls and
the accounting policies, and the overall audit process. |
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| Appointment of External Auditors |
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We
believe that a company’s auditor is an essential feature of an effective
and transparent system of external supervision. Shareholders should be
given the opportunity to vote on their appointment or re-appointment at the annual meeting.
We believe that it is imperative for audit committees to select outside
auditors who are independent from management. |
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| Approval of Financial
Statements |
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We believe the disclosure and
availability of reliable financial statements in a timely manner is
imperative for the investment process. We expect external auditors to
provide assurance of a company’s financial condition. Hence, we may vote
against the approval of financial statements if i) they have not been
disclosed or audited; ii) the auditor opinion is qualified/adverse, or the
auditor has issued a disclaimer of opinion; or iii) the auditor opinion is
not disclosed. |
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Capital
Structure, Reorganization, and Mergers State Street Global Advisors
believes that changes to a company’s capital structure, such as changes in
authorized share capital, share repurchase and debt issuances, are
critical decisions made by the board. We believe the company should have a
business rationale that is consistent with corporate strategy and should
not overly dilute its shareholders. |
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| Related-Party Transactions |
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Most companies in emerging markets
have a controlled ownership structure that often includes complex
cross-shareholdings between subsidiaries and parent companies (“related
companies”). As a result, there is a high prevalence of related-party
transactions between the company and its various stakeholders, such as
directors and management. In addition, inter-group loan and loan
guarantees provided to related companies are some of the
other |
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related-party transactions that increase
the risk profile of companies. In markets where shareholders are required
to approve such transactions, we expect companies to provide details about
the transaction, such as its nature, value and purpose. This also
encourages independent directors to ratify such transactions. Further, we
encourage companies to describe the level of independent board oversight
and the approval process, including details of any independent valuations
provided by financial advisors on related-party transactions. |
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| Share
Repurchase Programs |
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With
regard to share repurchase programs, we expect companies to clearly state
the business purpose for the program and a definitive number of shares to
be repurchased. |
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| Mergers and Acquisitions |
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Mergers or reorganization of the
structure of a company often involve proposals relating to
reincorporation, restructurings, liquidations and other major changes to
the corporation. Proposals that are in the best interest of the
shareholders, demonstrated by enhancing share value or improving the
effectiveness of the company’s operations, will be supported. In general,
provisions that are not viewed as financially sound or are thought to be
destructive to shareholders’ rights are not supported. |
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We evaluate mergers and structural
reorganizations on a case-by-case basis. We generally
support transactions that maximize shareholder value. Some of the
considerations include, but are not limited to, the
following: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including director and/ or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may vote against a transaction
considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting |
B-100
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We will
actively seek direct dialogue with the board and management of companies
that we have identified through our screening processes. Such engagements
may lead to further monitoring to ensure the company improves its
governance or sustainability practices. In these cases, we believe the
engagement process represents the most meaningful opportunity for State
Street Global Advisors to protect long-term shareholder value from
excessive risk due to poor governance and sustainability
practices. |
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| Compensation |
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We consider it to be the board’s
responsibility to set appropriate levels of executive remuneration.
Despite the differences among the types of plans and the potential awards,
there is a simple underlying philosophy that guides our analysis of
executive remuneration: there should be a direct relationship between
executive compensation and company performance over the long term. In
emerging markets, we encourage companies to disclose information on senior
executive remuneration. |
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Shareholders should have the opportunity to assess whether
pay structures and levels are aligned with business performance. When
assessing remuneration reports, we consider factors such as adequate
disclosure of remuneration elements, absolute and relative pay levels,
peer selection and benchmarking, the mix of long-term and short-term
incentives, alignment of pay structures with shareholder interests,
corporate strategy and performance. We may oppose remuneration reports
where pay seems misaligned with shareholders’ interests. We may also vote
against the re-election of
members of the remuneration committee if we have serious concerns about
remuneration practices and if the company has not been responsive to
shareholder pressure to review its approach. With regard to director
remuneration, we support director pay provided the amounts are not
excessive relative to other issuers in the market or industry, and are not
overly dilutive to existing shareholders. |
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| Risk Management |
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We believe that risk management is a
key function of the board, which is responsible for setting the overall
risk appetite of a company and for providing oversight on the risk
management process established by senior executives at a company. We allow
boards to have discretion regarding the ways in which they provide
oversight in this area. However, we expect companies to disclose how the
board provides oversight on its risk management system and risk
identification. Boards should also review existing and emerging risks that
evolve in tandem with a changing political and economic landscape or as
companies diversify or expand their operations into new
areas. |
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As responsible stewards, we believe
in the importance of effective risk management and oversight of issues
that are material to a company. To effectively assess the risk of our
clients’ portfolios and the broader market, we expect our portfolio
companies to manage risks and opportunities that are material and
industry-specific and that have a demonstrated link to long-term value
creation, and to provide high-quality disclosure of this process to
shareholders. |
B-101
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Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social
Issues |
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As a fiduciary, State Street Global
Advisors takes a comprehensive approach to engaging with our portfolio
companies about material environmental and social factors. Our Asset
Stewardship program prioritization process allows us to proactively
identify companies for engagement and voting in order to mitigate
sustainability risks in our portfolio. Through engagement, we aim to build
long-term relationships with the issuers in which we invest on behalf of
our clients and to address a broad range of topics relating to the
promotion of long-term shareholder value creation. When voting, we
fundamentally consider whether the adoption of a shareholder proposal
addressing an environmental or social topic material to the company would
promote long-term shareholder value in the context of the company’s
existing practices and disclosures as well as existing market
practice. |
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For
more information on our approach to environmental and social issues,
please see our Global Proxy Voting and Engagement Guidelines for
Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| General/Routine Issues |
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Some of
the other issues that are routinely voted on in emerging markets include
approving the allocation of income and accepting financial statements and
statutory reports. For these voting items, our guidelines consider several
factors, such as historical dividend payouts, pending litigation,
governmental investigations, charges of fraud, or other indication of
significant concerns. |
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| About
State Street Global Advisors |
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For four decades, State Street Global
Advisors has served the world’s governments, institutions and financial
advisors. With a rigorous, risk-aware approach built on research, analysis
and market-tested experience, we build from a breadth of index and active
strategies to create cost-effective solutions. And, as pioneers in index,
ETF, and ESG investing, we are always inventing new ways to invest. As a
result, we have become the world’s fourth-largest asset manager* with US
$3.48 trillion† under our
care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
B-102
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street,
Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612 9240-7611.
Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 185,
1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium
is a branch office of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Canada: State Street Global Advisors, Ltd., 1981 McGill College Avenue,
Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street East
Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900. France: State
Street Global Advisors Europe Limited, France Branch (“State Street Global
Advisors France”) is a branch of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. State Street Global Advisors France is registered in
France with company number RCS Nanterre 899 183 289, and its office is located
at Coeur Défense — Tour A —La
Défense 4, 33e étage, 100, Esplanade du Général de Gaulle,
92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44 45 41
92. Germany: State Street Global Advisors Europe Limited, Branch in
Germany, Brienner Strasse 59, D-80333
Munich, Germany (“State Street Global Advisors Germany”). T: +49 (0)89 55878
400. State Street Global Advisors Germany is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia
Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global
Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934.
T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global
Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is
a branch of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors Italy is registered in Italy with company
number 11871450968 —REA: 2628603 and VAT number 11871450968, and
its office is located at Via Ferrante Aporti, 10 -20125 Milan,
Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan: State Street
Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan,
Japan Securities Dealers’ Association. Netherlands: State
Street Global Advisors Netherlands, Apollo Building 7th floor,
Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000. State
Street Global Advisors Netherlands is a branch office of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors Limited.
Authorised and regulated by the Financial Conduct Authority. Registered in
England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395
6000. F: 020 3395 6350. United States: State Street Global Advisors, 1
Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
B-103
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness
of, nor liability for, decisions based on such information and it
should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate
EU regulator who are deemed both knowledgeable and experienced in
matters relating to investments. The products and services to which this
communication relates are only available to such persons and persons of any
other description (including retail clients) should not rely on this
communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State
Street to reflect certain ESG characteristics and does not represent
investment performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023 State Street Corporation.
All Rights Reserved.
ID1482392-3479918.3.1.GBL.RTL 0323 Exp. Date: 03/31/2024
B-104
March 2023
United Kingdom and Ireland
Proxy Voting and Engagement Guidelines
State Street Global Advisors’ Proxy Voting and Engagement
Guidelinesi for the
United Kingdom and Ireland outline our approach to voting and engaging with
companies listed on stock exchanges in the United Kingdom and Ireland. These
Guidelines complement and should be read in conjunction with State Street Global
Advisors’ Global Proxy Voting and Engagement Principles, which outline our
overall approach to voting and engaging with companies, and State Street Global
Advisors’ Conflicts Mitigation Guidelines, which provide information about
managing the conflicts of interests that may arise through State Street Global
Advisors’ proxy voting and engagement activities.
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These Proxy Voting and Engagement
Guidelines (the “Guidelines”) are also applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation. Additionally, State
Street Global Advisors maintains Proxy Voting and Engagement Guidelines
for select markets, including: Australia, continental Europe, Japan, New
Zealand, North America (Canada and the US), the UK and Ireland, and
emerging markets. International markets not covered by our market-specific
guidelines are reviewed and voted in a manner that is consistent with the
Global Proxy Voting and Engagement Principles; however, State Street
Global Advisors also endeavors to show sensitivity to local market
practices when voting in these various markets.
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B-105
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State
Street Global Advisors’ Proxy Voting and Engagement Guidelines for the
United Kingdom (“UK”) and Ireland address our market-specific approach to
topics including directors and boards, accounting and audit-related
issues, capital structure, reorganization and mergers, remuneration, and
other governance-related issues. |
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When
voting and engaging with companies in global markets, we consider
market-specific nuances in the manner that we believe will most likely
protect and promote the long-term economic value of client investments. We
expect companies to observe the relevant laws and regulations of their
respective markets, as well as country-specific best practice guideliness
and corporate governance codes. We may hold companies in some markets to
our global standards when we feel that a country’s regulatory requirements
do not address some of the key philosophical principles that we believe
are fundamental to our global voting principles. |
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In our
analysis and research into corporate governance issues in the UK and
Ireland, we expect all companies that obtain a primary listing on the
London Stock Exchange or the Irish Stock Exchange, regardless of domicile,
to comply with the UK Corporate Governance Code (the “Code”), and
proactively monitor companies’ adherence to the Code. Consistent with the
‘comply or explain’ expectations established by the Code, we encourage
companies to proactively disclose their level of compliance with the Code.
In instances of non-compliance in
which companies cannot explain the nuances of their governance structure
effectively, either publicly or through engagement, we may vote against
the independent board leader. |
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| State Street Global Advisors’ Proxy
Voting and Engagement Philosophy |
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In our view, corporate governance
and sustainability issues are an integral part of the investment process.
The Asset Stewardship Team consists of investment professionals with
expertise in corporate governance, remuneration, accounting, and
environmental and social issues. We have established robust corporate
governance principles and practices that are backed with extensive
analytical expertise to understand the complexities of the corporate
governance landscape. We engage with companies to provide insight on the
principles and practices that drive our voting decisions. We also conduct
proactive engagement to address significant shareholder concerns and
issues in a manner consistent with maximizing shareholder
value. |
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The team works alongside members of
State Street Global Advisors’ Active Fundamental and Europe, Middle East
and Africa (“EMEA”) investment teams, collaborating on issuer engagements
and providing input on company-specific
fundamentals. |
B-106
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| Directors and Boards |
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Principally, a board acts on behalf of shareholders by
protecting their interests and preserving their rights. In order to carry
out their primary responsibilities, directors have to undertake activities
that range from setting strategy and providing guidance on strategic
matters, overseeing executive management, to selecting the CEO and other
senior executives, creating a succession plan for the board and
management, and providing risk oversight, including of risks related to
sustainability issues. Further, we believe good corporate governance
necessitates the existence of effective internal controls and risk
management systems, which should be governed by the board. |
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We
believe that a well-constituted board of directors, with a balance of
skills, expertise and independence, provides the foundations for a
well-governed company. We view board quality as a measure of director
independence, director succession planning, board diversity, evaluations
and refreshment, and company governance practices. We vote for the (re-)election of directors on a case-by-case basis after
considering various factors, including board quality, general market
practice, and availability of information on director skills and
expertise. |
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We may
also consider board performance and directors who appear to be remiss in
the performance of their oversight responsibilities when analyzing their
suitability for reappointment (e.g. fraud, criminal wrongdoing and breach
of fiduciary responsibilities). |
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| Board Independence |
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In principle, we believe independent
directors are crucial to robust corporate governance and help management
establish sound corporate governance policies and practices. We believe a
sufficiently independent board will most effectively monitor management
and perform oversight functions necessary to protect shareholder
interests. |
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Our broad criteria for director
independence for UK companies include factors such as: |
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• Participation in related-party transactions and other
business relations with the company |
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• Employment history with company |
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• Excessive tenure and a preponderance of long-tenured
directors |
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• Relations with controlling shareholders |
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• Family ties with any of the company’s advisers, directors
or senior employees |
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• Company classification of a director as non-independent |
B-107
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| Director Attendance at Board
Meetings |
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We also consider attendance at board meetings and may
withhold votes from directors who attend less than 75 percent of
board meetings in a given year without appropriate explanation or
providing reason for their failure to meet the attendance threshold. In
addition, we monitor other factors that may influence the independence of
a non-executive director, such as
performance-related pay, cross-directorships and significant
shareholdings.
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| Classified
Boards |
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We
support the annual election of directors. |
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| Separation
Chair/CEO |
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While
we are generally supportive of having the roles of chair and CEO separated
in the UK market, we assess the division of responsibilities between chair
and CEO on a case-by-case basis, giving
consideration to factors such as the company’s specific circumstances,
overall level of independence on the board and general corporate
governance standards in the company. Similarly, we monitor for
circumstances in which a combined chair/CEO is appointed or a former CEO
becomes chair. |
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| Board Committees |
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We believe companies should have
committees for audit, remuneration and nomination oversight. The audit
committee is responsible for monitoring the integrity of the financial
statements of the company, the appointment of external auditors, auditor
qualifications and independence, and effectiveness and resource levels.
Similarly, executive pay is an important aspect of corporate governance,
and it should be determined by the board of directors. We expect companies
to have remuneration committees to provide independent oversight over
executive pay. We may vote against nominees who are executive members of
audit or remuneration committees. |
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We consider whether board members
have adequate skills to provide effective oversight of corporate strategy,
operations and risks, including environmental and social issues. Boards
should also have a regular evaluation process in place to assess the
effectiveness of the board and the skills of board members to address
issues such as emerging risks, changes to corporate strategy, and
diversification of operations and geographic footprint. The nomination
committee is responsible for evaluating and reviewing the balance of
skills, knowledge, and experience of the board. It also ensures that
adequate succession plans are in place for directors and the CEO. We may
vote against the re-election of
members of the nomination committee if, over time, the board has not
addressed concerns over board structure or succession. |
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Poorly
structured executive compensation plans pose increasing reputational risk
to companies. Ongoing high level of dissent against a company’s
compensation proposals may indicate that the company is not receptive to
investor concerns. If the level of dissent against a company’s
remuneration report and/or remuneration policy is consistently high, and
we have determined that a vote against a pay-related proposal is warranted in
the third consecutive year, we may vote against the Chair of the
remuneration committee. |
B-108
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| Board Gender Diversity |
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We expect boards of all listed
companies to have at least one female board member and the boards of FTSE
350 companies to be composed of at least 30 percent women directors.
If a company does not meet the applicable expectation, State Street Global
Advisors may vote against the chair of the board’s nominating committee or
the board leader in the absence of a nominating committee. Additionally,
if a company does not meet the applicable expectation for three
consecutive years, State Street Global Advisors may vote against all
incumbent members of the nominating committee or those persons deemed
responsible for the nomination process. |
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We may waive this voting guideline if a company engages with
State Street Global Advisors and provides a specific, timebound plan for
either reaching the 30-percent
threshold (FTSE 350) or for adding a woman director (non-FTSE 350).
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| Board
Racial/Ethnic Diversity |
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Effective board oversight of a company’s long-term business
strategy necessitates a diversity of perspectives, especially in terms of
gender, race and ethnicity. If a company in the FTSE 350 does not
disclose, at minimum, the gender, racial and ethnic composition of its
board, we may vote against the Chair of the nominating committee. We may
withhold support from the Chair of the nominating committee also when a
company in the FTSE 100 does not have at least one director from an
underrepresented racial and/or ethnic community on its board. |
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| Director Time Commitments |
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When voting on the election or re-election of a director, we also
consider the number of outside board directorships a non-executive and an executive may
undertake. Thus, State Street Global Advisors may take voting action
against a director who exceeds the number of board mandates listed
below: |
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Director nominees who sit on more than four public
company boards |
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For non-executive board chairs/lead
independent directors and director nominees who hold excessive
commitments, as defined above, we may consider waiving our policy and vote
in support of a director if a company discloses its director commitment
policy in a publicly available manner (e.g., corporate governance
guidelines, proxy statement, company website). This policy or associated
disclosure must include: |
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• A numerical limit on public company board seats a
director can serve on |
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– This limit cannot exceed our
policy by more than one seat |
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• Consideration of public company board leadership
positions (e.g., Committee Chair) |
B-109
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• Affirmation that all directors are currently compliant
with the company policy |
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• Description of an annual policy review process undertaken
by the Nominating Committee to evaluate outside director time
commitments |
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If a director is imminently leaving
a board and this departure is disclosed in a written, time-bound and
publicly-available manner, we may consider waiving our withhold vote when
evaluating the director for excessive time commitments. |
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Service on a mutual fund board, the
board of a UK investment trust or a Special Purpose Acquisition Company
(SPAC) board is not considered when evaluating directors for excessive
commitments. However, we do expect these roles to be considered by
nominating committees when evaluating director time
commitments. |
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| Climate-related Disclosures |
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State Street Global Advisors finds
that the recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) provide the most effective framework for disclosure of
climate-related risks and opportunities. |
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As such, we may take voting action
against companies in the FTSE 350 that fail to provide sufficient
disclosure regarding climate-related risks and opportunities related to
that company, or board oversight of climate-related risks and
opportunities, in accordance with the TCFD framework. |
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| Indemnification and Limitations on
Liability |
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Generally, we support proposals to
limit directors’ liability and/or expand indemnification and liability
protection up to the limit provided by law. This holds if a director has
not acted in bad faith, gross negligence, nor reckless disregard of the
duties involved in the conduct of his or her office. |
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| Shareholder Rights |
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| Virtual/Hybrid Shareholder
Meetings |
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As a result of the COVID-19 pandemic, companies are
increasingly conducting their shareholder meetings in a virtual or hybrid
format. While we are encouraged by the success of virtual and hybrid
shareholder meetings, companies and shareholders must remain vigilant in
continuing to improve their virtual shareholder meeting
practices. |
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by
shareholders |
B-110
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• Provide a written record of all questions posed during
the meeting, and Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a company breaches of any of the
criteria above, we may vote against the Chair of the nominating
committee. |
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| Accounting and Audit-Related Issues |
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Companies should have robust internal audit and internal
control systems designed for effective management of any potential and
emerging risks to company operations and strategy. The responsibility of
setting out an internal audit function lies with the audit committee,
which should have as members independent non-executive directors. Appointment of
External Auditors
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| Appointment of External Auditors |
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State
Street Global Advisors believes that a company’s auditor is an essential
feature of an effective and transparent system of external supervision.
Shareholders should be given the opportunity to vote on their appointment
or re-appoint at the annual
meeting. When appointing external auditors and approving audit fees, we
take into consideration the level of detail in company disclosures and
will generally not support such resolutions if an adequate breakdown is
not provided and if non-audit
fees are more than 50% of audit fees. In addition, we may vote against
members of the audit committee if we have concerns with audit-related
issues or if the level of non-audit fees to audit fees is
significant. In certain circumstances, we may consider auditor tenure when
evaluating the audit process. |
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| Limit
Legal Liability of External Auditors |
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We
generally oppose limiting the legal liability of audit firms because we
believe this could create a negative impact on the quality of the audit
function. |
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| Approval
of Financial Statements |
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We
believe the disclosure and availability of reliable financial statements
in a timely manner is imperative for the investment process. We expect
external auditors to provide assurance of a company’s financial condition.
Hence, we may vote against the approval of financial statements if i) they
have not been disclosed or audited; ii) the auditor opinion is
qualified/adverse, or the auditor has issued a disclaimer of opinion; or
iii) the auditor opinion is not disclosed. |
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Capital Structure, Reorganization, and
Mergers
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| Share Issuances |
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The ability to raise capital is
critical for companies to carry out strategy, to grow, and to achieve
returns above their cost of capital. The approval of capital raising
activities is essential to shareholders’ ability to monitor returns and to
ensure capital is deployed efficiently. We support capital increases that
have sound business reasons and are not excessive relative to a company’s
existing capital base. |
B-111
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Pre-emption rights are a fundamental
right for shareholders to protect their investment in a company. Where
companies seek to issue new shares without pre-emption rights, we may vote against
if such authorities are greater than 20% of the issued share capital. We
may also vote against resolutions that seek authority to issue capital
with pre-emption rights if the
aggregate amount allowed seems excessive and is not justified by the
board. Generally, we are against capital issuance proposals greater than
100% of the issued share capital when the proceeds are not intended for a
specific purpose. |
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| Share Repurchase Programs |
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We generally support a proposal to
repurchase shares. However, this is not the case if the issuer does not
clearly state the business purpose for the program, a definitive number of
shares to be repurchased, the range of premium/discount to market price at
which a company can repurchase shares, and the timeframe for the
repurchase. We may vote against share repurchase requests that allow share
repurchases during a takeover period. |
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| Dividends |
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We generally support dividend
payouts that constitute 30% or more of net income. We may vote against the
dividend payouts if the dividend payout ratio has been consistently below
30% without adequate explanation or the payout is excessive given the
company’s financial position. Particular attention will be paid where the
payment may damage the company’s long term financial health. |
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| Mergers and Acquisitions |
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Mergers or reorganizing the structure of a company often
involve proposals relating to reincorporation, restructurings, mergers,
liquidations, and other major changes to the corporation. Proposals that
are in the best interests of the shareholders, demonstrated by enhancing
share value or improving the effectiveness of the company’s operations,
will be supported. In general, provisions that are not viewed as
financially sound or are thought to be destructive to shareholders’ rights
and are not supported.
We will generally support transactions that maximize
shareholder value. Some of the considerations include the
following: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including, director and/ or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset value |
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We may vote against a transaction
considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid
stock |
B-112
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• Offers in which we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting
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| Anti-Takeover Measures |
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We oppose anti-takeover defenses
such as authorities for the board when subject to a hostile takeover to
issue warrants convertible into shares to existing
shareholders. |
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| Notice Period to Convene a General
Meeting |
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We expect companies to give as much
notice as is practicable when calling a general meeting. Generally, we are
not supportive of authorizations seeking to reduce the notice period to 14
days. |
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Remuneration
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| Executive Pay |
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Despite the differences among the types of plans and awards
possible, there is a simple underlying philosophy that guides our analysis
of executive pay: there should be a direct relationship between
remuneration and company performance over the long term.
Shareholders should have the opportunity to assess whether
pay structures and levels are aligned with business performance. When
assessing remuneration policies and reports, we consider adequate
disclosure of various remuneration elements, absolute and relative pay
levels, peer selection and benchmarking, the mix of long-term and
short-term incentives, alignment of pay structures with shareholder
interests as well as with corporate strategy and performance. We may
oppose remuneration reports where pay seems misaligned with shareholders’
interests. We may also vote against the re-election of members of the
remuneration committee if we have serious concerns about remuneration
practices or if the company has not been responsive to shareholder
concerns. |
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| Equity Incentive Plans |
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We may not support proposals on
equity-based incentive plans where insufficient information is provided on
matters such as grant limits, performance metrics, performance, vesting
periods, and overall dilution. Generally we do not support options under
such plans being issued at a discount to market price or plans that allow
for re-testing of performance
metrics. |
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| Non-Executive Director Pay |
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Authorities that seek shareholder
approval for non-executive
directors’ fees are generally not controversial. We typically support
resolutions regarding directors’ fees unless disclosure is poor and we are
unable to determine whether they are excessive relative to fees paid by
comparable companies. We will evaluate any non-cash or performance related pay to
non-executive directors on a
company- by-company
basis. |
B-113
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| Risk
Management |
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State Street Global Advisors believes that risk management
is a key function of the board, which is responsible for setting the
overall risk appetite of a company and for providing oversight of the risk
management process established by senior executives at a company. We allow
boards to have discretion over how they provide oversight in this area.
However, we expect companies to disclose how the board provides oversight
on its risk management system and risk identification. Boards should also
review existing and emerging risks that evolve in tandem with the with a
changing political and economic landscape or as companies diversify their
operations into new areas.
As responsible stewards, we believe in the importance of
effective risk management and oversight of issues that are material to a
company. To effectively assess the risk of our clients’ portfolios and the
broader market, we expect our portfolio companies to manage risks and
opportunities that are material and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality
disclosure of this process to shareholders.
Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Environmental and Social Issues |
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As a fiduciary, State Street Global Advisors takes a
comprehensive approach to engaging with our portfolio companies about
material environmental and social factors. Our Asset Stewardship program
prioritization process allows us to proactively identify companies for
engagement and voting in order to mitigate sustainability risks in our
portfolio. Through engagement, we aim to build long-term relationships
with the issuers in which we invest on behalf of our clients and to
address a broad range of topics relating to the promotion of long-term
shareholder value creation. When voting, we fundamentally consider whether
the adoption of a shareholder proposal addressing an environmental or
social topic material to the company would promote long-term shareholder
value in the context of the company’s existing practices and disclosures
as well as existing market practice.
For more information on our approach to environmental and
social issues, please see our Global Proxy Voting and Engagement
Guidelines for Environmental and Social Factors, available at ssga.com/about-us/asset-stewardship.html. |
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| About
State Street Global Advisors |
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For four
decades, State Street Global Advisors has served the world’s governments,
institutions and financial advisors. With a rigorous, risk-aware approach
built on research, analysis and market-tested experience, we build from a
breadth of index and active strategies to create cost-effective solutions.
And, as pioneers in index, ETF, and ESG investing, we are always inventing
new ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.48 trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
B-114
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2
245 9000. Australia: State Street Global Advisors, Australia, Limited
(ABN 42 003 914 225) is the holder of an Australian Financial Services License
(AFSL Number 238276). Registered office: Level 14, 420 George Street, Sydney,
NSW 2000, Australia.
T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170
Brussels, Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a
branch office of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Canada: State Street Global Advisors, Ltd., 1981 McGill College
Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide
Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located
at Coeur Défense — Tour A —La Défense 4, 33e étage, 100, Esplanade du Général de
Gaulle, 92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44
45 41 92. Germany: State Street Global Advisors Europe Limited, Branch in
Germany, Brienner Strasse 59, D-80333
Munich, Germany (“State Street Global Advisors Germany”). T: +49 (0)89 55878
400. State Street Global Advisors Germany is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Hong Kong: State
Street Global Advisors Asia Limited, 68/F, Two International Finance Centre, 8
Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852 2103-0200.
Ireland: State Street Global Advisors Europe
Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered
Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Italy: State Street Global Advisors Europe Limited, Italy Branch (“State
Street Global Advisors Italy”) is a branch of State Street Global Advisors
Europe Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is
registered in Italy with company number 11871450968 —REA: 2628603
and VAT number 11871450968, and its office is located at Via Ferrante Aporti, 10
-20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan:
State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F
1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors
B-115
Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00.
F: +41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No.
5776591 81. Registered office: 20 Churchill Place, Canary Wharf,
London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United States:
State Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641. T: +1
617 786 3000.
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be
considered a solicitation to buy or an offer to sell a security.
It does not take into account any investor’s particular investment objectives,
strategies, tax status or investment horizon. You should consult your tax and
financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind
relating to the accuracy, completeness or timeliness of the data
and have no liability for damages of any kind relating to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023 State Street Corporation.
All Rights Reserved.
ID1482704-3479919.3.1.GBL.RTL 0323 Exp. Date: 03/31/2024
B-116
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Guidance
Asset Stewardship
April 2023 |
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Guidance on Managing Geopolitical
Risk |
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As
asset stewards, we are aware of the financial risks associated with
geopolitical risk, including risks arising from unexpected conflict
between or among nations. Where appropriate, we may seek to mitigate
relevant risks through engagements and proxy voting. |
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Below
is our guidance and approach to stewardship in such instances in an effort
to protect shareholder value. |
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Guidance for
Impacted Companies |
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We expect our portfolio companies that may be impacted by
geopolitical risk to:
• Manage and mitigate risks related to operating in
impacted markets, which may include financial, sanctions, regulatory,
and/or reputational risks, among others;
• Strengthen board oversight of these efforts;
and
• Describe these efforts in public disclosures.
In addition to these conflict-specific expectations, our
existing Guidance on Human Rights Disclosures &
Practices applies to all companies in our portfolio. |
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| Engagements |
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We may
request engagements with portfolio companies that have been identified as
having exposure to geopolitical risk. Our objective will be to understand
how companies are disclosing and managing relevant sanctions, regulatory,
reputational, human rights-related, and financial risks (e.g., disruptions
to operations, supply chain, human capital management strategies), and to
encourage alignment with our expectations. |
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| Proxy
Voting |
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We may
consider using proxy voting to hold boards accountable for insufficient
oversight of relevant risks, in line with our existing oversight
expectations for directors. |
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| Conclusion |
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This
guidance is an example of the Asset Stewardship Team’s commitment to
proactively managing risks to our portfolio in order to enhance long-term
value for our clients. Please reach out to State Street Global Advisors’
Asset Stewardship Team at [email protected] to request an
engagement on this topic. |
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| About
State Street Global Advisors |
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Our clients are the world’s governments, institutions and
financial advisors. To help them achieve their financial goals we live our
guiding principles each and every day:
• Start with rigor
• Build from breadth
• Invest as stewards
• Invent the future
For four decades, these principles have helped us be the
quiet power in a tumultuous investing world. Helping millions of people
secure their financial futures. This takes each of our employees in 29
offices around the world, and a firm-wide conviction that we can always
do it better. As a result, we are the world’s fourth-largest asset
manager* with US $3.62 trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021.
† This figure is
presented as of March 31, 2023 and includes approximately $65.03 billion
USD of assets with respect to SPDR products for which State Street Global
Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing
agent. SSGA FD and State Street Global Advisors are affiliated. Please
note all AUM is unaudited. |
ssga.com
Marketing communications
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA).
This document is intended for Professional Clients
or Market Counterparties only as defined by the FSRA and no other
person should act upon it. State Street Global Advisors Limited, ADGM Branch, Al
Khatem Tower, Suite 42801,
Level 28, ADGM Square, Al Maryah Island, P.O Box 76404, Abu
Dhabi, United Arab Emirates. Regulated by the ADGM Financial Services Regulatory
Authority. T: +971 2 245 9000. Australia: State Street Global Advisors,
Australia, Limited (ABN
42 003 914 225) is the holder of an Australian Financial Services
License (AFSL Number 238276). Registered office: Level 14, 420 George
Street, Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612 9240-7611.
Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 185,
1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium
is a branch office of
State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. Canada: State Street Global Advisors, Ltd., 1981 McGill College
Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide
Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located at Coeur
Défense – Tour A – La Défense 4, 33e étage, 100, Esplanade du Général de Gaulle,
92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44 45 41
92. Germany: State Street Global Advisors Europe Limited,
Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
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Guidance on Managing
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B-118
Advisors Germany”). T: +49 (0)89 55878 400. State Street
Global Advisors Germany is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance
Centre, 8 Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852
2103-0200. Ireland: State Street Global Advisors Europe Limited is
regulated by the Central Bank of Ireland. Registered office address 78 Sir John
Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F:
+353 (0)1 776 3300. Italy: State Street Global Advisors Europe Limited,
Italy Branch (“State Street Global Advisors Italy”) is a branch of State Street
Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State
Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global
Advisors Netherlands is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State
Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00.
F: +41 (0)44 245 70 16. United Kingdom: State Street Global
Advisors Limited. Authorised and regulated by the Financial Conduct Authority.
Registered in England. Registered No. 2509928. VAT No. 5776591 81.
Registered office: 20 Churchill Place, Canary Wharf, London, E14
5HJ. T: 020 3395 6000. F: 020 3395 6350. United States: State Street
Global Advisors, 1 Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended April 12, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or
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Guidance on Managing
Geopolitical Risk |
B-119
transmitted or any of its contents disclosed to third parties
without SSGA’s express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a
solicitation to buy or an offer to sell a security. It does not take into
account any investor’s particular investment objectives, strategies,
tax status or investment
horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude
companies that do not meet the portfolio’s specified ESG criteria may trail
the returns on a portfolio of securities which include such companies. A
portfolio’s ESG criteria may result in the portfolio investing in industry
sectors or securities which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates
are only available to such persons and persons of any other description
(including retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind
relating to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is
not a research recommendation or ‘investment research’ and is
classified as a ‘Marketing Communication’ in accordance with the Markets in
Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation.
This means that this marketing communication (a) has not been prepared in
accordance with legal requirements designed to promote the independence of
investment research (b) is not subject to any prohibition on dealing ahead
of the dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1522578-4654606.2.1.GBL.RTL 0423 Exp. Date: 03/31/2024
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Guidance on Managing
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B-120
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Insights
Asset Stewardship
March 2023 |
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Guidance on Climate-related
Disclosures |
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At State Street Global
Advisors, we believe that managing climate-related risks and opportunities
is a key element in maximizing long-term risk-adjusted returns for our
clients. As a result, we have a longstanding commitment to enhance
investor-useful disclosure around this topic. We have encouraged our
portfolio companies to report in accordance with recommendations of the
Task Force for Climate-related Financial Disclosures (TCFD)1 since we first
endorsed the framework in 2017. Since then, companies have improved the
quality and quantity of climate-related disclosure and investors have
matured their expectations. |
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This guidance outlines our expectations with respect to the
disclosure of climate-related risks and opportunities and our approach to
voting and engagement on this important topic. We will continue to engage
with portfolio companies to ensure investors receive the information
needed to assess how companies are approaching climate-related risks and
opportunities.
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| Our
Expectations for Climate-related Disclosures |
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We expect all companies in our portfolios to offer public
disclosures in accordance with the four pillars of the TCFD framework:
Governance, Strategy, Risk Management, and Metrics and
Targets. |
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1 |
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Governance The TCFD recommends
companies describe the board’s oversight of, and management’s role in,
assessing and managing climate-related risks and
opportunities. |
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2 |
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Strategy The TCFD recommends
companies describe identified climate-related risks and opportunities and
the impact of these risks and opportunities on their businesses, strategy,
and financial planning. |
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3 |
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Risk Management The TCFD
recommends companies describe processes for identifying, assessing, and
managing climate-related risks and describe how these processes are
integrated into overall risk management. |
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4 |
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Metrics and Targets The TCFD recommends companies
disclose metrics and targets used to assess and manage climate-related
risks and opportunities.
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Disclosure Expectations for Effective Climate Transition
Plans |
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We believe it is our responsibility to provide portfolio
companies that have adopted a climate transition plan with clarity on our
expectations for effective climate transition plan
disclosure. |
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B-121
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In developing our climate transition plan disclosure
expectations, our asset stewardship team conducted an in-depth assessment of existing
disclosure frameworks and standards for relevant disclosures. We
considered several factors (e.g., market adoption, usefulness for
decision-making, applicability across sectors) and selected a core set of
disclosure expectations for companies that have adopted climate transition
plans.
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We recognize that there is no one-size-fits-all
approach to reaching net-zero and
that climate-related risks and opportunities can be highly nuanced across
and within industries. The expectations set out below serve to provide
transparency on the core criteria we expect companies that have adopted a
climate transition plan to address in their related
disclosures.
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Figure 1
Key Areas of Climate Transition Disclosure
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Category |
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Disclosure Expectations for Companies that Have Adopted a
Climate Transition Plan
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Ambition |
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Disclose what long-term climate ambition has been adopted by
the company |
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Targets |
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• |
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Disclose any interim GHG emissions
reduction targets |
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Disclose any commitment to align with temperature
goals |
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TCFD Disclosure |
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We promote adoption of TCFD-aligned
disclosure |
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Disclose any scenario analysis
performed by the company |
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• |
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Provide emissions reporting and assurance |
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Decarbonization Strategy |
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Disclose how the company’s transition
plan integrates into the company’s long-term strategy |
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Discuss decarbonization
actions |
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Disclose carbon offsets
utilization |
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Discuss decarbonization across the value chain |
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Capital Allocation Alignment |
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Disclose any integration of climate
considerations into capital allocation decisions |
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Disclose what capital expenditure is
made on low carbon strategies |
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• |
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Disclose the company’s approach to
carbon pricing |
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Disclose any investments in decarbonization |
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Climate Policy Engagement |
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Disclose any climate change policies
and positions |
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Disclose any trade association review |
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Climate Governance |
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Disclose board oversight of the climate
transition plan |
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Disclosure of management oversight of the climate transition
plan |
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Physical Risk |
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Disclose any physical risk assessment
performed by the company |
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Disclose the company’s physical risk management for
identified risks |
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Stakeholder Engagement |
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Disclose the company’s: |
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Industry collaboration |
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Investor engagement |
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Climate expert engagement |
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Internal engagement |
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B-122
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Voting
Incorporating Our Expectations into Our Proxy Voting
Policies |
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With
respect to voting on climate-related disclosure issues, we will first
engage with companies related to our climate-related disclosure
expectations outlined herein, focusing on companies and industries with
the greatest risk and opportunity. |
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| Director
Elections |
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Climate-related Disclosure Expectations
State Street Global Advisors has implemented the following
proxy voting guidelines:
• We may take voting action against companies in the
S&P 500, S&P/TSX Composite, FTSE 350, STOXX 600, and ASX 200
indices if companies fail to provide sufficient disclosure regarding
climate-related risks and opportunities related to that company, or board
oversight of climate related risks and opportunities, in accordance with
the TCFD framework. |
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Climate Transition Plan
Disclosure Expectations for Significant Emitters As a complement to
this director voting policy, we have launched an engagement campaign on
climate transition plan disclosure targeting significant emitters in
carbon-intensive sectors. Through our engagements, we will aim to better
understand climate transition plans and strategies, and gain insight on
each company’s unique set of climate-related risks and strategic
opportunities presented by the transition. |
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| Shareholder
Proposals |
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Climate-related
Shareholder Proposals |
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Below is the approach when
voting on climate-related shareholder proposals: |
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FOR We will consider voting for
shareholder proposals that we believe will lead to increased alignment
with our expectations for climate-related disclosures; |
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ABSTAIN We will consider voting
abstain when we support some elements of a proposal’s request, or
recognize a company’s commitment to implement related disclosure and/or
oversight practices; |
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• |
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AGAINST We will vote against
shareholder proposals that we believe are immaterial, overly prescriptive,
or would not further our disclosure and oversight
expectations |
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Guidance on
Climate-related Disclosures |
B-123
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| Engagements Incorporating Our Expectations into
Conversations with Companies |
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Climate continues to be a core stewardship priority for
State Street Global Advisors. During engagement, we may ask companies one
or more of the questions outlined below. |
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Governance
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• |
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Where is the responsibility for climate
oversight housed at the board level? How frequently does the board discuss
the topic of climate change? |
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How is climate — and other ESG —
experience considered in the board refreshment process? |
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• |
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How is the board incorporating key
sustainability drivers into the performance evaluation of
management? |
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• |
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How does management and the board
utilize external expertise to stay abreast of the emerging areas of
climate? |
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Strategy |
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• |
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How does the company integrate climate
considerations into business strategy and financial planning? |
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• |
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What actions are being considered to
support efforts to reduce GHG emissions across the value chain, such as
with suppliers and customers? |
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• |
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Where does the company identify the
greatest opportunities for decarbonization in the short- and
medium-term? |
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Risk
Management |
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• |
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How does the company consider
climate-related risks as part of overall risk management? What is the
board’s role? |
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• |
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Has the company assessed the potential
impacts of physical risk on its assets and operations? |
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• |
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How does the company manage
climate-related policy risks? Has the company conducted an assessment of
its stated climate positions versus those of its trade and industry
associations? |
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Metrics and
Targets |
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What metrics does the company utilize
to track progress on achieving its climate goals? |
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What sources of GHG emissions
contribute most significantly to the company’s carbon
footprint? |
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B-124
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What are the biggest challenges facing the company in
achieving its GHG emissions reduction targets?
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| Conclusion |
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We encourage companies in our portfolios to align their
climate-related disclosures and practices with our expectations and at the
same time we endeavor to communicate these expectations clearly to the
market. Please reach out to our Asset Stewardship team at
[email protected]. We look forward to engaging with you on
this important topic.
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| Endnotes |
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1 https://fsb-tcfd.org/publications/. |
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| About State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions.
And, as pioneers in index, ETF, and ESG investing, we are always inventing
new ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.48 trillion† under our care. |
| |
* Pensions & Investments Research Center, as of
December 31, 2021.
† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
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Guidance on
Climate-related Disclosures |
B-125
ssga.com
Marketing communication
State Street Global Advisors
Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services Licence
(AFSL Number 238276). Registered office: Level 14, 420 George Street,
Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium:
State Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a
branch office of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at
78 Sir John Rogerson’s Quay, Dublin 2.
Canada: State Street Global Advisors, Ltd., 1981 McGill
College Avenue, Suite 500 , Montreal, Quebec, H3A 3A8, T: +514 282 2400 and 30
Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France. T: +33 1
44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street Global Advisors
Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Hong Kong: State Street Global Advisors Asia
Limited, 68/F, Two International Finance Centre, 8 Finance Street, Central, Hong
Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global
Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934.
T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global
Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is
a branch of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. State Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02
32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership:
Japan
Investment Advisers Association, The Investment Trust Association,
Japan, Japan Securities Dealers’ Association. Netherlands: State Street
Global Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101
CN Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168,Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Registered with the Register of
Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F: +41 (0)44 245 70 16.
United Kingdom: State Street Global Advisors Limited. Authorised and
regulated by the Financial Conduct Authority. Registered in England. Registered
No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary
Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United
States: State Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641.
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Guidance on
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B-126
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based
on such information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a
solicitation to buy or an offer to sell a security. It does not take into
account any investor’s particular investment objectives, strategies,
tax status or investment horizon. You should consult your tax and financial
advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional
clients (this includes eligible counterparties as defined by the
appropriate EU regulator) who are deemed both knowledgeable and experienced in
matters relating to investments. The products and services to which this
communication relates are only available to such persons and persons of any
other description (including retail clients) should not rely on this
communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind
relating to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored
entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1483211-4117655.2.1.GBL.RTL 0323 Exp. Date: 03/31/2024
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Guidance on
Climate-related Disclosures |
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| Guidance |
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April 2023 |
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Asset
Stewardship |
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Guidance on Disclosure Expectations for Effective
Climate Transition Plans |
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As
the world mobilizes toward achieving net-zero emissions by midcentury, our
portfolio companies are adopting long-term climate ambitions in increasing
numbers. However, few have provided a clear roadmap to achieving these
goals — and fewer asset managers have provided detail on what companies
are expected to disclose as they prepare for a transition to a low-carbon economy.
State
Street Global Advisors is a signatory to the Net Zero Asset Managers
initiative. We encourage companies in relevant sectors1 to develop climate
transition plans that take into account the risks and opportunities
associated with a transition to a lower carbon economy. To that end, we
believe it is our responsibility to provide portfolio companies with
clarity on our expectations for effective climate transition plan
disclosure to help ensure we — and the broader investor community —
receive the information necessary to assess each company’s preparedness
for a transition to a low-carbon
economy. |
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| Our Process for Developing Disclosure
Expectations |
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The Asset Stewardship team conducted an in-depth assessment of existing ESG
frameworks and standards for relevant climate-related disclosures. We
considered several factors (e.g., market adoption, usefulness for
decision-making, applicability across sectors, financial materiality) and
selected a core set of disclosures for climate transition plans that we
believe would be useful to investors like us. We leveraged existing
frameworks and considered market practice to help reduce the reporting
burden on companies while benefiting investors with more consistent and
robust disclosure. |
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Our selected disclosures
are organized into ten categories that closely align with those found in
the Institutional Investors Group on Climate Change (IIGCC) Net-Zero Investment Framework, which is
a widely accepted framework that provides guidance to investors on
assessing portfolio company transition plan disclosure 2. We included two
additional categories, “Physical Risk” and “Stakeholder Engagement”, as we
believe these are critical in understanding company performance and
represent areas where disclosure practices could be improved. |
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Our
Approach: Stakeholder
Engagement |
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We conducted a series of engagements with key
stakeholders — portfolio companies in carbon-intensive sectors, asset
owners, investor advocates and coalitions, and internal cross-functional
subject matter experts — to collect feedback on our expectations and help
inform our approach. Through these engagements, we identified areas of
disclosure that are realistic and others where the market may need more
time to coalesce around methodologies. |
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While stakeholders
generally agree on the value of considering the risks presented by the
social impacts of the transition to a low-carbon economy — including on
workers, communities, and customers — we found that the definition of
“just transition” and related disclosure expectations is still emerging.
In 2022, we conducted a series of targeted engagements with companies in
key sectors including Energy, Materials, and Utilities to understand best
practices and disclosure trends on managing risks and opportunities
associated with workforce transformation, customer affordability,
stakeholder engagement, and supply chain management, among others. We
continue to prioritize engagement on this topic to inform our disclosure
expectations related to just transition. |
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Disclosure
Expectations
for Effective Climate Transition Plans |
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We recognize that there is no one-size-fits-all
approach to climate transition plans and that climate-related risks and
opportunities are highly nuanced across and within industries. The
expectations set out below serve to provide transparency on the core
criteria we expect companies that have adopted a climate transition plan
to address in their related disclosures. |
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We recognize this is an emerging area of disclosure and
we will continue to develop our expectations over time, including
consideration of any mandated disclosure by
regulators. |
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Figure
1
Key
Areas of Climate Transition Disclosure |
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Category |
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Disclosure
Expectations for Companies that Have Adopted a Climate Transition
Plan |
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Ambition |
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• Disclose
what long-term climate ambition has been adopted by the company |
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Targets |
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• Disclose
any interim GHG emissions reduction targets |
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• Disclose
any commitment to align with temperature goals |
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TCFD Disclosure |
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• We
promote adoption of TCFD-aligned disclosure |
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• Disclose
any scenario analysis performed by the company |
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• Provide
emissions reporting and assurance |
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Decarbonization Strategy |
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• Disclose
how the company’s transition plan integrates into the company’s long-term
strategy |
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• Discuss
decarbonization actions |
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• Disclose
carbon offsets utilization |
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• Discuss
decarbonization across the value chain |
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Capital Allocation Alignment |
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• Disclose
any integration of climate considerations into capital allocation
decisions |
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• Disclose
what capital expenditure is made on low carbon strategies |
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• Disclose
the company’s approach to carbon pricing |
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• Disclose
any investments in decarbonization |
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Climate Policy Engagement |
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• Disclose
any climate change policies and positions |
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• Disclose
any trade association review |
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Climate Governance |
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• Disclose
board oversight of the climate transition plan |
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• Disclosure
of management oversight of the climate transition plan |
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Physical Risk |
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• Disclose
any physical risk assessment performed by the company |
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• Disclose
the company’s physical risk management for identified
risks |
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Stakeholder Engagement |
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• Disclose
the company’s: |
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— |
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Industry collaboration |
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Investor engagement |
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Climate expert engagement |
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Internal engagement |
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Applying
our Expectations to Proxy Voting and
Engagement |
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We encourage companies in relevant sectors to develop
climate transition plans that take into account the risks and
opportunities associated with a transition to a lower carbon economy.
Through our engagements, we will aim to better understand climate
transition plans and strategies, and gain insight on each company’s unique
set of climate-related risks and strategic opportunities presented by the
transition. We may consider taking voting action against directors of a
company in a relevant sector3 if those directors
fail to implement and communicate effective oversight of climate
transition risks applicable to that company and fail to demonstrate
responsiveness to us and sufficient disclosure following engagement. |
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Say on Climate |
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While we are generally supportive of the goals of “Say
on Climate” proposals because we support effective climate-related
disclosure, we currently do not endorse an annual advisory climate vote.
We have reservations with the potential unintended consequences of such a
vote, including insulating directors from accountability, distracting from
existing frameworks, and straining investors’ limited proxy voting
resources. Where management chooses to include a Say on Climate vote, we
assess the company’s disclosure on a case-by-case basis consistent
with our Disclosure Expectations for Effective Climate Transition Plans in
Figure 1 above. |
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We would consider
supporting a “Say on Climate” shareholder proposal if the company has not
provided investors with meaningful climate-related disclosure in line with
our expectations, nor signaled the intention to enhance disclosure in the
future. For more information on our approach to climate voting and
engagement see our Guidance on Climate-related
Disclosures. |
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| Conclusion |
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We encourage companies in
our portfolios to align their climate-related disclosures and practices
with our expectations and at the same time we endeavor to communicate
these expectations clearly to the market. Please reach out to our Asset
Stewardship team at [email protected]. We look forward to
engaging with you on this important topic |
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| Endnotes |
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1 As defined by the IIGCC Net Zero Investment
Framework |
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2 SSGA referred to the IIGCC Net Zero Investment
Framework which provides a list of alignment criteria for assessing
transition plans for listed equity and fixed income |
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3 As defined by the IIGCC Net Zero Investment
Framework |
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About
State Street
Global
Advisors |
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For four decades, State Street Global Advisors has
served the world’s governments, institutions and financial advisors. With
a rigorous, risk-aware approach built on research, analysis and
market-tested experience, we build from a breadth of index and active
strategies to create cost-effective solutions. And, as pioneers in index,
ETF, and ESG investing, we are always inventing new ways to invest. As a
result, we have become the world’s fourth-largest asset manager* with US
$3.62 trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of March 31, 2023 and includes approximately
$65.03 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is unaudited. |
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ssga.com
Marketing Communication
State Street Global Advisors
Worldwide
Entities
____________________________
Abu
Dhabi: State Street Global Advisors Limited, ADGM branch is regulated by the
Financial Services Regulatory Authority (FSRA). This document is intended for
Professional Clients or Market Counterparties only as defined by the FSRA and no
other person should act upon it. State Street Global Advisors Limited, ADGM
Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM Square, Al Maryah
Island, P.O Box 76404, Abu Dhabi, United Arab Emirates. Regulated by the ADGM
Financial Services Regulatory Authority. T: +971 2 245 9000. Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the
holder of an Australian Financial Services License (AFSL Number 238276).
Registered office: Level 14, 420 George Street, Sydney, NSW 2000,
Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State Street
Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T:
+32 2 663 2036.
State
Street Global Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State Street
Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A
3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario
M5C 3G6. T: +647 775 5900. France: State Street Global Advisors Europe
Limited, France Branch (“State Street Global Advisors France”) is a branch of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France.
T:
+33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street Global
Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934,
authorised
and regulated by the Central Bank of Ireland, and whose registered office is at
78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is
registered in Italy with company number 11871450968 — REA: 2628603 and VAT
number 11871450968, and its office is located at Via Ferrante Aporti, 10 -20125
Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan: State
Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934,
B-133
authorised
and regulated by the Central Bank of Ireland, and whose registered office is at
78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State Street Global
Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Registered with the Register of
Commerce Zurich CHE-105.078.458. T: +41
(0)44 245 70 00. F: +41 (0)44 245 70 16. United Kingdom: State Street
Global Advisors Limited. Authorised and regulated by the Financial Conduct
Authority. Registered in England. Registered No. 2509928. VAT
No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf,
London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United States: State
Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641.
Investing
involves risk including the risk of loss of principal.
The
information provided does not constitute investment advice and it should not be
relied on as such. It should not be considered a solicitation to buy or an offer
to sell a security. It does not take into account any investor’s particular
investment objectives, strategies, tax status or investment horizon. You should
consult your tax and financial advisor.
The
information contained in this communication is not a research recommendation or
‘investment research’ and is classified as a ‘Marketing Communication’ in
accordance with the Markets in Financial Instruments Directive (2014/65/EU) or
applicable Swiss regulation. This means that this marketing communication
(a) has not been prepared in accordance with legal requirements designed to
promote the independence of investment research (b) is not subject to any
prohibition on dealing ahead of the dissemination of investment research.
All
information is from SSGA unless otherwise noted and
has
been obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The
whole or any part of this work may not be reproduced, copied or transmitted or
any of its contents disclosed to third parties without State Street Global
Advisors’ express written consent.
ETFs
trade like stocks, are subject to investment risk and will fluctuate in market
value. The investment return and principal value of an investment will fluctuate
in value, so that when shares are sold or redeemed, they may be worth more or
less than when they were purchased. Although shares may be bought or sold on an
exchange through any brokerage account, shares are not individually redeemable
from the fund. Investors may acquire shares and tender them for redemption
through the fund in large aggregations known as “creation units.” Please see
the
fund’s prospectus for more details.
The
returns on a portfolio of securities which exclude companies that do not meet
the portfolio’s specified ESG criteria may trail the returns on a portfolio of
securities which include such companies. A portfolio’s ESG criteria may result
in the portfolio investing in industry sectors or securities which underperform
the market as a whole.
Equity
securities may fluctuate in value and can decline significantly in response to
the activities of individual companies and general market and economic
conditions
The
whole or any part of this work may not be reproduced, copied or transmitted or
any of its contents disclosed to third parties without State Street Global
Advisors’ express written consent.
© 2023 State Street
Corporation.
All
Rights Reserved.
ID1523300-
4117397.4.1.GBL.RTL 0423 Exp. Date: 05/31/2024
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Insights |
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Asset Stewardship |
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Guidance on Environmental
Management Disclosures
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| March 2023 |
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Addressing Deforestation Risk
in Supply Chains
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| Key Takeaways |
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• Global deforestation is a major driver of biodiversity
loss and climate change, and has significant environmental, social and
financial implications for ecosystems, communities, companies and
investors. |
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• Deforestation presents a risk to companies with material
links to this practice in their supply chains and investments, and should
be disclosed and managed like any other business risk. |
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• In response to heightened regulatory, reputational, and
financial risks, boards and management teams of companies which source and
produce commodities at high risk of deforestation, or finance these
activities, should respond accordingly. This includes managing
deforestation and land degradation risk in their supply chains and
enhancing disclosure on these efforts. |
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• There is no standard framework among companies to
establish deforestation policies or disclose related oversight practices,
risk management efforts, targets and commitments, or performance KPIs,
making it difficult for investors to assess exposure to material
deforestation-related risks. |
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• Partnerships with regional policymakers and local
stakeholders are a critical component of managing deforestation-related
risks in the supply chain. Successful approaches include public-private
partnerships with local policymakers, inclusive training of the local
workforce in more sustainable practices, protection of human rights and
the respect of Free, Prior and Informed Consent (“FPIC”) of local
communities. |
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• While nearly 80% of the companies we engaged with
acknowledge the value of forests in their public disclosures, only 21%
formally recognize deforestation as a business risk. |
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• Among the companies engaged, 58% are signatories to
initiatives tackling deforestation. To achieve effective management of
deforestation risk, companies should consider following this first step
with enhanced sustainable business practices, supply chain risk
mitigation, robust board oversight and disclosure of these
efforts. |
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| Background |
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Deforestation is a major driver of
biodiversity loss and climate change, and has significant environmental,
social and financial implications for ecosystems, communities, companies,
and investors. Globally, forests are disappearing at increasing rates.
Since 2015, an estimated 10 million hectares of forests have been
lost every year, primarily driven by commercial agriculture and production
of commodities, including palm oil, soy and cattle.1 |
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Forests represent environmental and
social value, providing habitat for over 80% of the world’s terrestrial
biodiversity and supporting livelihoods for human populations living in
and near these forests.2
As critical carbon sinks, forests also play an important role in
climate change mitigation, absorbing up to 30% of carbon emissions from
industry and fossil fuels every year.3 |
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Article 5 of the Paris Climate
Agreement4
recognizes deforestation as a key component of mitigating greenhouse
gas (GHG) emissions with the IPCC stating that deforestation and
conversion of natural ecosystems to human uses contributes 11% of global
GHG emissions.5
Tropical deforestation alone contributes 7%, mostly driven by the
production of agricultural and forest commodities. As the world moves
toward achieving net-zero
emissions by midcentury, our portfolio companies exposed to deforestation
and land degradation in their value chains must consider these topics when
adopting long-term climate ambitions. |
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Deforestation can also have human
rights-related implications, resulting in headline, human capital and
legal risk for companies with exposure to land degradation practices in
their supply chain. This includes the potential displacement of local
communities and destruction of areas that provide cultural importance or
essential resources such as food, fuel and medicine.6 A growing body of
evidence has also linked deforestation to outbreaks of infectious disease
among local communities and workforces,7 as native animal
species are forced out of their habitats to live among human
populations. |
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Global momentum around addressing
deforestation and nature loss has accelerated with the launch of the Task
Force on Nature-related Financial Disclosures (TNFD)8 and the focus on
nature as part of the COP 26 agenda. Among the various nature-related
commitments to come out of the summit, the most pertinent to addressing
deforestation was the Glasgow Leaders’ Declaration on Forest and Land
Use. Countries hosting 90% of global forests, along with financial
institutions and companies, signed a pledge to “halt and reverse forest
loss and land degradation by 2030 while delivering sustainable development
and promoting an inclusive rural transformation.”9 |
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For companies contributing to
deforestation through their supply chains and investments, these trends
represent a significant shift requiring a renewed approach to their
services, products and engagement culture with stakeholders. Aside from
presenting an inherent business risk, companies with deforestation
exposure are facing heightened regulatory, reputational, and financial
risk. At State Street Global Advisors, we believe it is important for
boards and management to work to manage risks related to deforestation and
land degradation in their supply chains and to enhance disclosure around
these efforts. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
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| Stewardship Focus Area: Land
Use & Biodiversity |
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Deforestation is an increasingly important area of focus for
the State Street Global Advisors’ Asset Stewardship program. Environmental
management — spanning topics that include land use, biodiversity, natural
resources and the circular economy — has been a thematic stewardship
priority for our program for several years. Effective environmental
management encompasses all environmental impacts, within both a company’s
operations and its supply chain. In 2022, our team will deepen our focus
on land use and biodiversity, conducting targeted engagement campaigns,
providing guidance to our investee companies and publishing thought
leadership on these subjects.
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| Deforestation Engagement
Campaign |
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In 2021, we initiated a series of
targeted engagements with our investee companies with direct exposure to
deforestation in their supply chains — primarily those that source
agricultural and forest commodities. Our objective was to learn more about
how these companies exercise oversight of their supply chains and how they
are managing the various material risks stemming from
deforestation. |
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We relied on existing frameworks,
including those from the CDP,10 Sustainability
Accounting Standards Board (SASB),11 United Nations
Environment Program (UNEP),12 United Nations Global
Compact (UNGC),13
and Ceres14
to identify high-impact sectors, and engaged 15 of our significant
holdings in those sectors to request in-depth engagements (see the Appendix
for a list of companies engaged). |
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We chose to focus on engaging
companies in the Food & Beverage and Consumer Goods sectors, due
to their usage or production of the core commodities and activities
responsible for the majority of agriculture-related deforestation. This
includes, but is not limited to, cattle, palm oil, cocoa, leather, rubber,
soy, timber and mining. |
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Our conversations with companies
centered on topics including: |
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• Supply chain risk management; |
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• Product certifications & industry
organizations; |
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• Participation in the policymaking
process; |
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• Land rights preservation and community stakeholder
engagement; |
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• Human rights and FPIC of local
communities; |
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• Ingredient traceability and identifying high-risk
commodities; |
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• Reputational risk and evolving consumer
preferences; |
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• The shifting regulatory context; and |
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• Board oversight of deforestation-related
risks. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
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We also engaged with external
experts including non-governmental organizations, issue
advocates, academic institutions and industry coalitions to understand
their perspectives on managing risks related to deforestation. The
individuals from these groups helped inform our engagement approach and
contextualize our insights gleaned from these
conversations. |
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| Engagement Insights |
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As a result of our engagements and
review of company disclosure practices, we identified the following key
challenges that companies face and some potential best practices they have
adopted to identify and address deforestation risks in their supply chain.
These insights are discussed in further detail in the sections
below. |
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• Supply Chain Risk Management While many of the
engaged companies have established supplier code of conducts, ongoing
monitoring and non-compliance
protocols differentiate leaders from laggards. Challengingly, a lack of
industry consensus exists regarding how to engage non-compliant suppliers, stalling the
implementation of no-deforestation commitments and
allowing product produced on deforested lands to enter global supply
chains. |
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• Integrity of Auditing Process During the Pandemic
Due to safety concerns of conducting in-person audits during the ongoing
pandemic, companies have had to pivot and virtually engage in innovative
ways, including satellite monitoring and wearable technology. While the
pandemic catalyzed innovation, this remote monitoring should be coupled
with a return to recurring on-the-ground engagement to be
most effective. |
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• Product Certification Several industry
standard-setters play a critical role in defining industry best practices
for product certification, but our investee companies echoed the belief
that membership and certification are a floor for risk management, not a
ceiling. |
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• Government Relations and Policymaking Process
Challenges arise for companies when working with local governments
with weak land use policies and lax enforcement by authorities. Pragmatic
public-private partnerships with local policymakers and international
organizations can fortify company efforts to create a more resilient
supply chain, protect shareholder value, and benefit local
stakeholders. |
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• Community Engagement &
Protection of Human Rights While often characterized as an
environmental risk, deforestation also presents a number of social risks
that companies must consider. Companies should adopt policies that address
indigenous rights such as FPIC and broader human rights topics, such as
forced or child labor. Strong policies on these topics should be supported
by stakeholder engagement in the value chain so that companies will have
access to unfiltered information and perspectives from key
communities. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-138
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• No-Deforestation Commitments,
Metrics & KPIs In our earlier publication,
“Effective Climate-Risk Disclosure in the Agricultural and Forestry
Sectors through the Lens of the Task Force on Climate-related Financial
Disclosures” we highlighted the need for companies in high-impact
sectors to set goals to reduce their carbon emissions. Similar timebound
goals should be considered when managing deforestation-related risks
stemming from key commodities in the supply chain. |
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Disclosure Insights |
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The 15 companies we engaged disclose the following
information related to deforestation: |
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• 79% acknowledge the value of forests; |
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• 58% are signatories to initiatives tackling
deforestation; |
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• 50% have established senior-level oversight and reporting
structures for deforestation-related risks; |
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• 21% formally recognize deforestation as a business risk;
and |
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• 14% have integrated performance metrics related to
deforestation-linked commodities into their executive compensation and
broader performance evaluation programs. |
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| Disclosure Expectations for
Companies |
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Companies with material exposure to
deforestation in their value chain and/or investments should continue to
improve their disclosure in the following areas: |
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• Board-level oversight and accountability for
deforestation and land use-related risks |
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• Reporting and targets to reduce emissions linked to
deforestation |
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• Conservation or reforestation activity taken by the
company |
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• How deforestation is managed as a business
risk |
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• Quantitative and qualitative metrics covering high-risk
commodities across value chain
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Management Disclosures Addressing Deforestation Risk in Supply
Chains |
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| Identifying and Mitigating Risks in the Supply
Chain |
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Supplier Engagement An end-to-end approach to ongoing
supplier engagement is an essential component of risk management for
companies with exposure to deforestation-related commodities. In our
engagement with Conagra Brands, an American consumer packaged goods
company, we learned how its Supplier Excellence Program facilitates
engagement with the company’s vendors. Conagra assesses key suppliers at
least annually on ESG risk-related performance and disclosure. This annual
sustainability assessment is supplemented by quarterly performance
discussions and risk analyses, and regular consultation between all
parties to address any operational issues or gaps in
disclosure. |
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| Supplier
Monitoring |
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While
many of the engaged companies have established supplier code of conducts,
ongoing supplier monitoring for compliance with these codes can prove
difficult to implement and requires regular independent review. At
Hormel Foods Corporation, an American food processing company, the
company’s South American beef suppliers have ensured their compliance with
relevant requirements by creating monitoring systems for farms supplying
cattle, leveraging satellite images and geo-referenced maps of farms,
deforestation data and information from public agencies regarding
embargoed? areas and human rights. This oversight is coupled with
independent audits of all environmental monitoring systems. |
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| Supplier
Non-Compliance |
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Companies without a defined protocol for dealing with non-compliant suppliers may have
greater exposure to deforestation risk and may suffer reputational and/or
legal consequences by working with suppliers that are misaligned with
policy expectations. We found a lack of consensus on how companies engage
with non-compliant suppliers,
which can delay the termination of relationships with suppliers that fail
to adequately address deforestation. Post Holdings, Inc., an
American consumer packaged goods company, requires its suppliers to follow
an annually reviewed code of conduct, and any potential breach of this
conduct is reviewed in a consistent and transparent manner. Industry
organizations like the Global Food Safety Initiative (GFSI) ensure that
third-party operations audits assist in identifying non-compliant suppliers and share this
information among members. |
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| High Risk
Commodity Exposure |
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The
investee companies we engaged with shared a variety of approaches to
identifying key ingredients in their products, as well as which
commodities were most exposed to deforestation risk. These prioritization
frameworks were generally holistic, science-based, and dependent on robust
supply chain audits. The results of the identification process are
paramount, as they inform the metrics and key performance indicators of
companies’ deforestation policies and commitments. We learned how The
Kraft Heinz Company, an American multinational food company partnered
with the Rainforest Alliance, an NGO, to expand its forest risk
commodities supply chain assessment to include soy. This work included
surveying their suppliers, evaluating sustainable product certifications
and better understanding sourcing risks based on counties of origin. The
findings from this exercise were material, with over a third of the
company’s global soy volume sourced from potential high-risk counties of
origin. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-140
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| COVID-19 Supply Chain Auditing
Challenges |
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The
global COVID-19 pandemic limited
abilities to conduct in-person
audits of suppliers, catalyzing innovation in virtual monitoring, while
raising questions about the effectiveness of this method in the long-term.
Some of our investee companies reported investing further in satellite
monitoring capabilities, while others explored new solutions like wearable
technology. Post Holdings, Inc equipped on-site employees with Google Glasses
to connect with virtual teams to complete multi-party audits in real time.
Several of the engaged companies also emphasized the need to maintain
employee privacy and ensure that these remote tools don’t breach these
obligations or trust. Safely fast-tracking the adoption of these new
technologies, while preserving employee privacy and protecting against
cybersecurity threats, were both expressed as continued focus areas for
our investee companies. |
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| Product
Certifications & Industry Organizations |
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Many of
our investee companies emphasized the importance of participating in
industry organizations to mitigate risk and work with their suppliers.
These organizations provide certifications for companies who fulfill the
required environmental and social criteria. Organizations frequently cited
in our engagements included: |
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• the Roundtable on Sustainable Palm Oil
(RSPO); |
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• the Forest Stewardship Council, (FSC); |
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• the Sustainable Forest Initiative (SFI); |
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• the Program for Forest Endorsement (PEFC);
and |
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• USDA Organic
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These standard-setters play a critical role in defining
industry best practices and encouraging stronger oversight practices, but
our investee companies echoed our belief that membership and certification
are a floor for risk management, not a ceiling. Compliance with the
standards and receiving certification are a strong initial step, but
companies cannot be overly reliant on this process and take this as a
proxy for total risk mitigation. |
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Engaging with Policymakers and
Local Governments |
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Participating in industry coalitions
and obtaining certification are valuable in creating more sustainable and
resilient supply chains, and mitigating social and reputational risk.
However, these mechanisms are largely voluntary, and their effectiveness
for member companies depends on the jurisdiction their supply chains are
located in. Several investee companies told us of the challenge posed when
working with local governments with weak land use policies and lax
enforcement by authorities. To achieve the systemic change required to
meet the 2030 Glasgow pledge, and to mitigate continued environmental and
social risk stemming from deforestation practices, companies may need to
consider how to best participate in the policy-making
conversation. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-141
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Highlighting the outsized impact one
company’s efforts can have in this process, Mondelez
International, Inc., an American multinational confectionery, food,
holding and beverage and snack food company, has spent ten years fostering
multi-lateral public-private partnerships in one of its critical supply
chain domiciles, sub-Saharan
Africa. In Ghana, the company developed “Cocoa Life”,15 a program which
incentivizes cocoa farmers to adopt more sustainable practices through
increased economic benefits like achieving higher yields using less
fertilizers and land. Mondelez built on this progress by announcing a
formal partnership with the Forest Commission of Ghana, Cocoa Board and
United Nations Development Program (“UNDP”) to reduce deforestation and
forest degradation in the country while simultaneously reducing emissions
in its cocoa supply chain. |
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Pragmatic public-private partnerships with local
policymakers and international organizations can fortify company efforts
to improve supply chain resilience, protect shareholder value, and benefit
local stakeholders. |
| |
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Addressing Evolving Shareholder
& Stakeholder Expectations |
|
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In recent years, evolving consumer
preferences and increased awareness of deforestation’s impacts —
particularly its contribution to biodiversity loss and climate change —
have led issue advocates and investors to demand enhanced disclosure from
companies exposed to deforestation risk. Since 2016, 11
deforestation-related shareholder proposals have been submitted to a
shareholder vote, with two of them receiving majority support for the
first time in 2021.16
Following the submission of one such proposal at
Procter & Gamble, an American multinational
consumer goods corporation, requesting that the company report on efforts
to eliminate deforestation from its forest pulp and palm oil supply chain,
Procter & Gamble responded across several fronts. These actions
included implementing public grievance reporting, strengthening its palm
oil sourcing policy, advancing company conservation and restoration
efforts and accelerating its RSPO certification targets to 2021 from 2022.
Investors, issue advocates and consumers will likely continue to hold
companies accountable through deforestation-related shareholder proposals
moving forward, and boards should prepare to strengthen their disclosure
efforts and management oversight accordingly. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-142
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| Preserving
Land Rights and Engaging with Community Stakeholders |
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Effective approaches to acting on deforestation-related
commitments must consider the land rights and livelihoods of local people,
particularly indigenous communities. As part of Bunge Limited’s
commitment to reaching deforestation-free value chains by 2025, we
learned how the American agribusiness and food company engages with
farmers to protect native vegetation and establishes incentives to support
this shift to more sustainable value chains. This process includes fairly
compensating farmers who commit to sustainable agricultural practices and
avoid negative conversion, discouraging the practice of converting
forested land to agriculture in favor of expanding across areas already
open for production. |
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| Protecting
Human Rights and Respecting FPIC of Local Communities |
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|
A
critical component of fostering sustainable value chains is the protection
of human rights and respect of FPIC of local communities. Responding to
feedback from issue advocates, Kellogg Company, an American
multinational food manufacturing company, materially revised its
deforestation-related commitments to protect local stakeholders in the
communities with exposure to its supply chain. These pledges include
immediately suspending company groups which perpetrate threats and
violence towards human rights advocates, communities and workers. The
company also committed to participate in and fund jurisdictional and
landscape approaches which fully respect the FPIC of local
communities. |
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| Establishing Deforestation Policies and
Commitments |
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|
Several
of the companies we engaged with have committed to establishing no-deforestation ambitions within their
supply chains covering key commodities. These policies tend to have time
horizons ranging from 2025 to 2030, in line with the global pledge made at
COP26. In the absence of a common industry disclosure framework on this
subject, the implementation and associated disclosure of these plans
varies by company. The Kroger Co., an American retail company that
operates supermarkets and multi-department stores, articulated its
commitment to source from deforestation-free processes across its four key
commodities of palm oil, beef, soy and pulp/paper/timber, with varying
implementation mechanisms and certifications for each
commodity. |
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| Measuring Success |
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As companies navigate the aforementioned challenges, there
are a range of deforestation-related metrics and KPIs being used to
measure success. High-level goals are typically supported by
commodity-specific objectives on varying timelines, and progress against
these objectives is shared with management, the board and shareholders.
For example, The Campbell Soup Company, an American
processed food and snack company is focused on reaching 100% of its
suppliers passing a social compliance audit by 2025, while achieving equal
success in determining accurate country of origin traceability on products
derived from high-risk commodities. Mondelez International Inc.
continues to report on 10 KPIs associated with its Cocoa Life project,
covering target topics in the value chain, including elimination of child
labor, supplier compliance certification, and ingredient traceability.
Clorox Company, an American global manufacturer and marketer of
consumer and professional products has committed to halve the amount of
virgin plastic and virgin fiber used in packaging by 2030.
To build on these initial efforts, stakeholders in our
engagements expressed the need for a standardized disclosure framework
that provides added transparency on how companies are performing against
any deforestation-related targets and commitments. Benefits cited include
defining relative and absolute performance thresholds and incentivizing
the adoption of better practices among industry
peers. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-143
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| Conclusion |
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At
State Street Global Advisors, we believe that global deforestation —
namely its direct linkage to biodiversity loss and climate change —
presents a risk to companies with material exposure to this practice in
their supply chains and investments, and should be disclosed and managed
like any other business risk. This perspective, along with our fiduciary
duty to act on behalf of our clients’ long-term interests, informs our
asset stewardship efforts on this topic. By sharing these insights from
our targeted engagement campaign and analysis of public disclosures, our
intention is to equip Boards to more effectively respond to the threat of
deforestation. |
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Companies in high-exposure sectors
are taking various steps to address risks related to global deforestation
in their supply chain and investments, but there are a number of
challenges they face while identifying and remediating these issues. We
will continue to engage with companies to inform our ongoing efforts in
this space. Please reach out to our team at [email protected]
to request an engagement on this important
topic. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-144
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Appendix: Companies
Engaged as Part
of Deforestation
Engagement Campaign |
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Company
Name |
|
Market/Country |
|
Sector |
| |
|
|
AGCO Corporation |
|
United States |
|
Resource Transformation |
| |
|
|
Bunge Limited |
|
United States |
|
Food & Beverage |
| |
|
|
Campbell Soup Company |
|
United States |
|
Food & Beverage |
| |
|
|
Conagra Brands, Inc. |
|
United States |
|
Food & Beverage |
| |
|
|
Darden Restaurants, Inc. |
|
United States |
|
Food & Beverage |
| |
|
|
Hormel Foods Corporation |
|
United States |
|
Food & Beverage |
| |
|
|
Kellogg Company |
|
United States |
|
Food & Beverage |
| |
|
|
Mondelez International, Inc. |
|
United States |
|
Food & Beverage |
| |
|
|
Post Holdings, Inc. |
|
United States |
|
Food & Beverage |
| |
|
|
The Clorox Company |
|
United States |
|
Consumer Goods |
| |
|
|
The J.M. Smucker Company |
|
United States |
|
Food & Beverage |
| |
|
|
The Kraft Heinz Company |
|
United States |
|
Food & Beverage |
| |
|
|
The Procter & Gamble
Company |
|
United States |
|
Consumer Goods |
| |
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|
The Kroger Co. |
|
United States |
|
Food & Beverage |
| |
|
|
Weyerhaeuser Company |
|
United States |
|
Renewable Resources & Alternative
Energy |
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| Endnotes |
|
|
|
1 Global Forest Resources Assessment 2020 — Key findings”
Food and Agriculture Organization of the United Nations.
(2020) http://fao.org/3/CA8753EN/ CA8753EN.pdf.
2 “Forests Sourcebook: Practical Guidance For Sustaining
Forests In Development Cooperation” World Bank-WWF Alliance for Forest
Conservation and Sustainable Use (2008) World Bank
Document.
3 Labbate, Gabriel. “Deforestation Factsheet”, United
Nations Environment Programme, (April 2021),
https://wedocs.unep.org/bitstream/
handle/20.500.11822/35851/DF.pdf.
4 “Paris Agreement”. United Nations Framework
Convention on Climate Change. (April 2016).
5 “Climate Change and Land: An IPCC Special Report on
climate change, desertification, land degradation, sustainable land
management, food security, and greenhouse gas fluxes in terrestrial
ecosystems”, Intergovernmental Panel on Climate Change, (January
2020), https://ipcc.ch/site/assets/uploads/
sites/4/2020/02/SPM_Updated-Jan20.pdf.
6 “Indonesia: Indigenous Peoples Losing Their Forests”
Human Rights Watch (September 2019) hrw.org/
news/2019/09/22/indonesia-indigenous-peoples-losing-their-forests#. |
|
7 Gross, Anna. Schipani, Andres. Palma, Stefania. Findlay,
Stephanie. “Global Deforestation Accelerates During the Pandemic”, The
Financial Times, (August 2020),
https://ft.com/content/b72e3969-522c-4e83-b431-c0b498754b2d.
8 “The TNFD Nature-related & Opportunity
Management and Disclosure Framework” Taskforce on Nature-related Financial
Disclosures, (March 2020) https://tnfd.
global/wp-content/uploads/2022/03/220321-TNFD- framework-beta-v0.1-Exec-Summary-FINAL.pdf.
9 “Glasgow Leaders’ Declaration on Forests and Land Use”,
UN Climate Change Conference UK 2021, (February 2021), https://ukcop26.org/glasgow-leaders-declaration-on-forests-and-
land-use/.
10 “The Collective Effort to End Deforestation: A Pathway
For Companies to Raise Their Ambition”, CDP, (March 2021), https://cdn.cdp.net/cdp-production/cms/reports/
documents/000/005/630/original/CDP_Forests_
analysis_report_2020.pdf?1616334771.
11 “Processed Foods: Sustainability Accounting Standard”,
Sustainability Accounting Standards Board, (October 2018) https://sasb.org/wp-content/
uploads/2018/11/
Processed_Foods_Standard_2018.pdf. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-145
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12 Labbate, Gabriel. “Deforestation Factsheet”, United
Nations Environment Programme, (April 2021),
https://wedocs.unep.org/bitstream/
handle/20.500.11822/35851/DF.pdf.
13 “A Spotlight on Sustainable Supply Chain &
Procurement”, United Nations Global Compact (December 2021),
https://unglobalcompact.org/take-
action/leadership/integrate-sustainability/roadmap/
supply-chain.
14 “The Investor Guide to Deforestation and Climate
Change”, Ceres, (June 2020), https://ceres.org/sites/ default/files/reports/2020-06/Ceres%20Investor%20
Guide%20FINAL%20June%2029.pdf. |
|
15 Van Cutsem, Cedric. “Action Plans to Protect and
Restore Forests, with Farmers at the Heart”, Cocoa Life: Mondelez
International, (March 2019). https://cocoalife. org/progress/action-plans-to-protect-and-restore-
forests-with-cocoa-life-farmers-at-the-heart.
16 Dhanasarnsombat, Sansanee. “Deforestation Shareholder
Proposals Wins Signals a Shift”, Bloomberg Law, (August
2021). https://news. bloomberglaw.com/ bloomberg-law-analysis/analysis-deforestation-shareholder-proposal-wins-signal-a-shift. |
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| About State Street Global
Advisors |
|
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Our clients are the world’s governments, institutions and
financial advisors. To help them achieve their financial goals we live our
guiding principles each and every day:
|
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• |
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Start with rigor |
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• |
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Build from breadth |
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Invest as stewards |
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• |
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Invent the future |
| |
For four decades, these principles have helped us be the
quiet power in a tumultuous investing world. Helping millions of people
secure their financial futures. This takes each of our employees in 29
offices around the world, and a firm-wide conviction that we can always
do it better. As a result, we are the world’s fourth-largest asset
manager* with US $3.48 trillion† under our care.
|
| |
* Pensions & Investments Research Center, as of
December 31, 2021. |
| |
† This figure is
presented as of December 31, 2022 and includes approximately
$58.60 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is
unaudited. |
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-146
ssga.com
Marketing communications
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Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T:
+514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6.
T: +647 775 5900. France: State Street Global Advisors Europe
Limited, France Branch (“State Street Global Advisors France”) is a branch of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Hong Kong: State Street Global
Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance Street,
Central, Hong Kong. T: +852 2103-0288. F: +852 2103-0200.
Ireland: State Street Global Advisors Europe Limited is regulated by
the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s
Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1
776 3300. Italy: State Street Global Advisors Europe Limited, Italy
Branch (“State Street Global Advisors Italy”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
Italy is registered in Italy with company number 11871450968 — REA: 2628603 and
VAT number 11871450968, and its office is located at Via Ferrante Aporti, 10
-20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan:
State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F
1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers
Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-147
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or
warranty as to the current accuracy, reliability or completeness
of, nor liability for, decisions based on such information and it should not be
relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate
EU regulator) who are deemed both knowledgeable and experienced in matters
relating to investments. The products and services to which this communication
relates are only available to such persons and persons of any other description
(including retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out
of the scoring model is based on sustainability and corporate
governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1483402-4641947.2.1.GBL.RTL 0323 Exp. Date: 03/31/2024
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Guidance on Environmental
Management Disclosures Addressing Deforestation Risk in Supply
Chains |
B-148
May
2023
Asset
Stewardship
Guidance
on Human Rights Disclosures & Practices
State
Street Global Advisors is committed to upholding human rights, and we expect our
investee companies to as well given the reputational, regulatory, legal, and
operational risks that human rights violations can pose to a company. We expect
portfolio companies to regularly identify whether there are risks related to
human rights1 in their
operations and manage any material risks that emerge, providing relevant
disclosures to investors.
| |
1 |
As defined in the Universal Declaration
of Human Rights and the ILO Declaration on Fundamental Principles
and Rights at Work. |
B-149
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| Our Expectations for Human Rights Disclosures |
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We
expect companies to disclose whether they have established processes for
identifying risks related to human rights. If any material human rights
risks are identified, we expect further public disclosure describing:
1.
Human rights-related risks the company considers most material;
2.
Plans to manage and mitigate these risks;
3.
Board oversight of these risks; and
4.
Assessment of the effectiveness of the human rights risk management
program. |
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State Street Global Advisors believes that best
practices for enhancing human rights-related disclosures include
describing: |
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• Specific
geographic regions, industries, resources, or types of workforce where the
risk is highest;
• How
workers, civil society organizations, and other stakeholders are involved
in identifying and mitigating issues;
• Which
mechanisms exist for workers to raise grievances without fear of
retaliation; and
• How
the company supports impacted individuals in providing restorative
remedy. |
| |
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| Engagements |
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Incorporating Our Expectations Into Conversations with
Companies |
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We will engage companies on
this topic, prioritizing companies with the highest risk of human rights
violations. When assessing the risk level of a particular company, we will
consider the company’s industry, region, and business model; any history
of human rights violations; and client and stakeholder input. In 2021, we
initiated a targeted engagement campaign on modern slavery, and in 2022,
we undertook another series of proactive engagements on human rights,
targeting companies who were noncompliant with the UN Global Compact. We
also requested reactive engagements with specific companies if we were
made aware that they had been accused of human rights violations. |
| |
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| Thought Leadership Addressing Modern Slavery in
Supply Chains |
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In Q3 2021, we initiated a series of targeted
engagements on the topic of modern slavery. We relied on existing
frameworks including SASB, the Global Slavery Index, and the International
Labor Organization to identify high-risk sectors, and reached out to our
largest holdings in those sectors to request in-depth engagements. We focused on
companies in industries where modern slavery poses an outsized risk,
especially given the increasing reputational and regulatory risks
associated with forced labor in the supply chain. Through this process, we
gleaned insights into companies’ best practices to inform our ongoing
stewardship efforts in this space. To review our insights from this
campaign, please visit Modern Slavery Insights. |
B-150
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Voting
Incorporating
Our Expectations into Our Proxy Voting and Engagement Practices |
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With
respect to voting on human rights-related disclosure issues, we will first
engage with companies related to our human rights-related disclosure
expectations outlined herein, focusing on companies and industries with
the greatest risk and opportunity.
Below
is the approach we follow when voting on human rights related shareholder
proposals: |
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• FOR
we will consider voting for shareholder proposals that we believe will
lead to increased alignment with our expectations for human rights related
disclosures; |
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• ABSTAIN
we will consider voting abstain when we support some elements of a
proposal’s request, or recognize a company’s commitment to implement
related disclosure and/or oversight practices; |
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• AGAINST
we will vote against shareholder proposals that we believe are
immaterial, overly prescriptive, or would not further our disclosure and
oversight expectations. |
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| Investment and Research
Activities |
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State Street Global
Advisors also incorporates human rights into investment and research
activities. Our firm allocated significant resources toward building our
ESG data architecture which gives our portfolio managers and researchers
access to a variety of best-in-class data vendors. Our
colleagues have access to best-in-class data on companies’
human rights practices. |
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| Conclusion |
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We encourage companies in
our portfolios to align their disclosures and practices with our
expectations. Please reach out to State Street Global Advisors’ Asset
Stewardship Team at [email protected] to request an
engagement on this important topic. |
| |
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| About State Street Global
Advisors |
|
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For four decades, State
Street Global Advisors has served the world’s governments, institutions
and financial advisors. With a rigorous, risk-aware approach built on
research, analysis and market-tested experience, we build from a breadth
of index and active strategies to create cost-effective solutions. And, as
pioneers in index, ETF, and ESG investing, we are always inventing new
ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.62 trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of March 31, 2023 and includes approximately
$65.03 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is unaudited. |
B-151
ssga.com
State
Street Global Advisors
Marketing
Communications
Worldwide
Entities
Abu
Dhabi: State Street Global Advisors Limited, ADGM branch is regulated
by the Financial Services Regulatory Authority (FSRA). This document is intended
for Professional Clients or Market Counterparties only as defined by the FSRA
and no other person should act upon it. State Street Global Advisors Limited,
ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM Square, Al Maryah
Island, P.O Box 76404, Abu Dhabi, United Arab Emirates. Regulated by the ADGM
Financial Services Regulatory Authority. T: +971 2 245 9000. Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the
holder of an Australian Financial Services License (AFSL Number 238276).
Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia. T:
+612 9240-7600. F: +612 9240-7611. Belgium: State Street Global Advisors
Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T: +32 2 663 2036.
State Street Global Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and
regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir
John
Rogerson’s Quay, Dublin 2. Canada: State Street Global Advisors,
Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514
282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T:
+647 775 5900. France: State Street Global Advisors Europe Limited,
France Branch (“State Street Global Advisors France”) is a branch of State
Street Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street
Global
Advisors Asia Limited, 68/F, Two International Finance Centre, 8 Finance
Street, Central, Hong Kong. T: +852 2103-0288. F: +852 2103-0200.
Ireland: State Street Global Advisors Europe Limited is regulated by the
Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay,
Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776
3300. Italy: State Street Global Advisors Europe Limited, Italy Branch
(“State Street Global Advisors Italy”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
Italy is registered in Italy with company number 11871450968 — REA: 2628603 and
VAT number 11871450968, and its office is located at Via Ferrante Aporti, 10
-20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan:
State Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F
1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors
Netherlands,
Apollo Building 7th floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T:
+31 20 7181 000. State Street Global Advisors Netherlands is a branch office of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road,
#33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. South Africa: State Street Global Advisors Limited
is regulated by the Financial Sector Conduct Authority in South Africa under
license number 42670. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20
Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395
6350. United States: State Street Global Advisors, 1 Iron Street, Boston,
MA 02210-1641. T: +1 617 786 3000.
B-152
Important
Risk Information
Investing
involves risk including the risk of loss of principal.
The
returns on a portfolio of securities which exclude companies that do not meet
the portfolio’s specified ESG criteria may trail the returns on a portfolio of
securities which include such companies. A portfolio’s ESG criteria may result
in the portfolio investing in industry sectors or securities which underperform
the market as a whole.
Responsible-Factor
(R Factor) scoring is designed by State Street to reflect certain ESG
characteristics and does not represent investment performance. Results generated
out of the scoring model is based on sustainability and corporate governance
dimensions
The
information contained in this communication is not a research recommendation or
‘investment research’ and is classified as a ‘Marketing Communication’ in
accordance with the Markets in Financial Instruments Directive (2014/65/EU) or
applicable Swiss regulation.
This
means that this marketing communication (a) has not been prepared in
accordance with legal requirements designed to promote the independence of
investment research (b) is not subject to any prohibition on dealing ahead
of the dissemination of investment research.
The
views expressed in this material are the views of SSGA Asset Stewardship Team
through the period ended May 26, 2023 and are subject to change based on
market and other conditions. This document contains certain statements that may
be deemed forward-looking statements. Please note that any such statements are
not guarantees of any future performance and actual results or developments may
differ materially from those projected.
Investing
involves risk including the risk of loss of principal.
The
whole or any part of this work may not be reproduced, copied or transmitted or
any of its contents disclosed to third parties without SSGA’s express written
consent.
All
information is from SSGA unless otherwise noted and
has
been obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The
information provided does not constitute investment advice and it should not be
relied on as such. It should not be considered a solicitation to buy or an offer
to sell a security. It does not take into account any investor’s particular
investment objectives, strategies, tax status or investment horizon. You should
consult your tax and financial advisor.
The
returns on a portfolio of securities which exclude companies that do not meet
the portfolio’s specified ESG criteria may trail the returns on a portfolio of
securities which include such companies. A portfolio’s ESG criteria may result
in the portfolio investing in industry sectors or securities which underperform
the market as a whole.
This
communication is directed at professional clients (this includes eligible
counterparties as defined by the appropriate
EU
regulator) who are deemed both knowledgeable and experienced in matters relating
to investments. The products and services to which this communication relates
are only available to such persons and persons of any other description
(including retail clients) should not rely on this communication.
The
trademarks and service marks referenced herein are the property of their
respective owners. Third party data providers make no warranties or
representations of any kind relating to the accuracy, completeness or timeliness
of the data and have no liability for damages of any kind relating to the use of
such data. Responsible-Factor (R Factor) scoring is designed by State Street to
reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
© 2023 State Street
Corporation. All Rights Reserved.
ID1483214-4044035.5.1.GBL.RTL
0323 Exp. Date: 06/30/2024
B-153
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Insights
Asset Stewardship |
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Guidance on Board Oversight of Director Time
Commitments |
| April
2023 |
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| Key Takeaways |
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• The global COVID-19 pandemic and an elevated
culture of shareholder engagement have heightened the time commitment
required to serve as a director on a public company board.
• Investors would benefit from increased transparency over
how Nominating Committees assess their directors’ time commitments and
what factors are included in this discussion.
• This guidance sets forth our expectations for Nominating
Committees to evaluate their directors’ time commitments, regularly assess
director effectiveness, and provide public disclosure on their policies
and efforts to investors. |
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| A Historic
Transition |
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The
global COVID-19 pandemic and an
elevated culture of shareholder engagement have heightened the time
commitment required to serve as a director on a public company board.
State Street Global Advisors’ Asset Stewardship team values the critical
role that effective boards play in keeping management focused on their
companies’ long-term goals. Through our engagements with portfolio
companies, we learned how their strategies and operations are continuously
reinvented to meet a confluence of challenges, including the global health
crisis and the systemic risks of climate change and gender, racial and
ethnic inequity. These forces continue to shape board agendas, with
directors citing corporate resiliency1 as the emerging topic
most central to their conversations in 2021. |
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| The Evolving Role and
Expectations of Directors |
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To
effectively manage the risks and opportunities facing their companies,
directors are meeting more often. In 2021, S&P 500 boards formally met
an average of 9.4 times,2
a 25% year-over-year increase. FTSE 150 boards held an average of
11.6 meetings in 2021, a 50% increase compared to 2020,3 reflecting the global
nature of this development. |
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Additionally, a more robust engagement culture with both
internal and external stakeholders has placed more demands on directors’
time.
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B-154
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| SPAC
Directorship |
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The rise of Special Purpose Acquisition Companies (“SPACs”)
continues to shape our governance discussions with boards. The rapid pace
of SPAC activity has continued to challenge traditional models of
corporate governance, and has driven strong demand for qualified SPAC
directors, many of whom also serve as public company
directors. |
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Through our continued dialogue with
directors serving on both SPAC and public company boards, we have learned
the following: |
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• While SPAC director time commitment requirements vary
depending on the individual and SPAC board, they are generally less than
the average time associated with public company
directorship. |
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• SPACs are typically subject to a two-year time horizon to find an
acquisition target, and directors are generally called on to spend their
most significant service time in the final months before the acquisition
closes with the target company. |
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• Typically, no more than one SPAC director rolls onto the
new entity’s board in an official capacity. |
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• In many cases, multiple members of the SPAC sponsor
management team remain on the board once the target company goes
public. |
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• SPAC sponsors play a much more time-consuming role
relative to directors, and their responsibilities include raising capital,
deal sourcing, and conducting deep due diligence on potential
targets. |
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• SPAC director responsibilities include evaluating target
candidates, facilitating industry introductions, and providing general
oversight over the process. |
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Given these findings, we do not consider service on a SPAC
board when evaluating directors for excessive commitments. However, we do
expect these roles to be considered by Nominating Committees when
evaluating director time commitments.
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| Our
Guidance on Director Time Commitments |
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Insights gleaned from our director
engagements, coupled with a growing body of research,4 reflect the
ever-increasing time commitment associated with serving as a director on a
public company board. Directors have a challenging role, and the topics
they are expected to oversee have increased in scope and
complexity. |
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Guidance on Board
Oversight of Director Time Commitments |
B-155
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Despite the elevated oversight
expectations on directors and the company boards on which they serve, 112
boards among the S&P 500 do not report specific limits on additional
board service.5
Investors would benefit from increased transparency over how Nominating
Committees assess their directors’ time commitments and what factors are
included in these decisions. We believe well-governed boards are
responsible for establishing, enforcing and disclosing their director
commitment policies. |
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We expect Nominating Committees to evaluate their directors’
time commitments, regularly assess director effectiveness, and provide
public disclosure on their policies and efforts to investors.
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Voting
Incorporating Our Guidance into Our Voting
Policies |
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When voting on the election or re-election of a director, we consider
the number of outside board directorships that a non-executive and an executive may
undertake. Thus, State Street Global Advisors may take voting action
against a director who exceeds the number of board mandates listed
below: |
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Director nominees who sit on more than four public
company boards |
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For non-executive board chairs/lead
independent directors and director nominees who hold excessive
commitments, as defined above, we may consider waiving our policy and vote
in support of a director if a company discloses its director commitment
policy in a publicly available manner (e.g., corporate governance
guidelines, proxy statement, company website). This policy or associated
disclosure must include: |
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• A numerical limit on public company board seats a
director can serve on |
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— This limit cannot exceed our policy by more than one
seat |
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• Consideration of public company board leadership
positions (e.g., Committee Chair) |
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• Affirmation that all directors are currently compliant
with the company policy |
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• Description of an annual policy review process undertaken
by the Nominating Committee to evaluate outside director time
commitments
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Guidance on Board
Oversight of Director Time Commitments |
B-156
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A Sample Disclosure Might Look Like: |
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“Directors can sit on no more than five public company
boards (including our own), with consideration given to public company
leadership roles and outside commitments. The Nominating Committee
conducts an annual review of director commitment levels, and affirms that
all directors are compliant at this time.” |
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If a director is imminently leaving a board and this
departure is disclosed in a written, time-bound and publicly-available
manner, we may consider waiving our withhold vote when evaluating
directors for excessive commitments.
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Service on a mutual fund board, the board of a UK investment
trust or a Special Purpose Acquisition Company (SPAC) board is not
considered when evaluating directors for excessive commitments. However,
we do expect these roles to be considered by Nominating Committees when
evaluating director time commitments.
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| Conclusion |
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We
remain focused on our fiduciary duty to improve long-term value of our
clients’ investments. It is our conviction that well-governed boards are
best placed to evaluate their directors’ time commitments, and that
Nominating Committees are responsible for establishing, enforcing and
disclosing their director commitment policies to
investors. |
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| Endnotes |
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1 Celia Huber, Frithjof Lund and Nina Speilmann,
“How boards have risen to the COVID-19 challenge, and what’s next,”
McKinsey & Company, (April 2021), https://
mckinsey.com/business-functions/strategy-and-corporate
-finance/our-insights/how-boards-have
-risen-to-the-covid-19-
challenge-and-whats-next.
2 2Julie Hembrock Daum, Kathleen M. Tamayo, Ann Yerger,
“2021 U.S. Spencer Stuart Board Index,” Spencer Stuart,
(November 2021), https://spencerstuart.com/-/ media
/2021/october/ssbi2021/us-spencer-stuart
-board-index-2021.pdf.
3 3Tessa Bamford, Monisha Banerjee, Livia Enomoto, Keith
Fryer, Leoni Fruhwirth, Celia Jackson, Nadia Kangmasto, Alastair Rolfe,
Alice Wyatt. “2021 UK Spencer Stuart Board Index” Spencer Stuart,
(November 2021), https://spencerstuart.com/
research-and-insight/uk-
board-index. |
|
4 Celia Huber, Frithjof Lund and Nina
Speilmann, “How boards have risen to the COVID-19 challenge, and what’s next,”
Julie Hembrock Daum, Kathleen M. Tamayo, Ann Yerger, “2021 U.S. Spencer
Stuart Board Index,”
5 Julie Hembrock Daum, Kathleen M. Tamayo, Ann Yerger,
“2021 U.S. Spencer Stuart Board Index,” |
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Guidance on Board
Oversight of Director Time Commitments |
B-157
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| About State Street Global
Advisors |
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Our
clients are the world’s governments, institutions and financial advisors.
To help them achieve their financial goals we live our guiding principles
each and every day: |
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• Start with rigor |
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• Build from breadth |
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• Invest as stewards |
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• Invent the future |
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For four decades, these principles have helped us be the
quiet power in a tumultuous investing world. Helping millions of people
secure their financial futures. This takes each of our employees in 29
offices around the world, and a firm-wide conviction that we can always
do it better. As a result, we are the world’s fourth-largest asset
manager* with US $3.62 trillion† under our care.
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is
presented as of March 31, 2023 and includes approximately
$65.03 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affliiated. Please note all AUM is
unaudited. |
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Guidance on Board
Oversight of Director Time Commitments |
B-158
ssga.com
Marketing Communication
State Street Global Advisors
Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA).
This document is intended for Professional Clients or Market
Counterparties only as defined by the FSRA and no other person should act upon
it. State Street Global Advisors Limited, ADGM Branch, Al Khatem Tower, Suite
42801, Level 28, ADGM Square, Al Maryah Island, P.O Box 76404, Abu Dhabi,
United Arab Emirates. Regulated by the ADGM Financial Services Regulatory
Authority. T: +971 2 245 9000. Australia: State Street Global Advisors,
Australia, Limited (ABN 42 003 914 225) is the holder of an Australian Financial
Services License (AFSL Number 238276). Registered office: Level 14, 420
George Street, Sydney, NSW 2000, Australia. T: +612 9240-7600. F: +612
9240-7611. Belgium: State Street Global Advisors Belgium, Chaussée de La
Hulpe 185, 1170 Brussels, Belgium. T: +32 2 663 2036. State Street Global
Advisors Belgium is a branch office of State Street Global Advisors Europe
Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin
2. Canada: State Street Global Advisors, Ltd., 1981 McGill
College Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30
Adelaide Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France. T: +33 1
44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street Global Advisors
Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia Limited,
68/F, Two International Finance Centre, 8 Finance Street, Central,
Hong Kong. T: +852 2103-0288. F: +852 2103-0200. Ireland: State
Street Global Advisors Europe Limited is regulated by the Central Bank of
Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2.
Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Italy: State Street Global Advisors Europe Limited, Italy Branch (“State
Street Global Advisors Italy”) is a branch of State Street Global Advisors
Europe Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Italy is
registered in Italy with company number 11871450968 — REA: 2628603 and VAT
number 11871450968, and its office is located at Via Ferrante Aporti, 10 -20125
Milan, Italy. T: +39 02 32066 100. F: +39 02 32066 155. Japan: State
Street Global Advisors (Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building
7th floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T:
+31 20 7181 000. State Street Global Advisors Netherlands is a branch office of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore:
State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
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Guidance on Board
Oversight of Director Time Commitments |
B-159
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended April 12, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no
representation or warranty as to the current accuracy, reliability
or completeness of, nor liability for, decisions based on such information and
it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability for damages of any kind relating
to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results
generated out of the scoring model is based on sustainability and
corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1522581-4055816.3.1.GBL.RTL 0423
Exp. Date: 03/31/2024
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Guidance on Board
Oversight of Director Time Commitments |
B-160
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Insights
Asset Stewardship
March 2023 |
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Corporate Participation in the Political Process in the
United States |
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This
guidance describes the framework we use to analyze shareholder proposals
regarding corporate participation in the political process in the United
States. |
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| Background |
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Corporate participation in the political process is common
practice in the United States, and we believe it continues to carry risks
that warrant stronger board oversight and increased transparency.
Companies that make political contributions, pursue lobbying activities,
or support politically-active industry groups in the United States have a
responsibility to provide adequate disclosure to investors, and their
boards should oversee political activities. |
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What
follows is an overview of the framework we use to evaluate three common
political activity shareholder proposal themes: 1) political
contributions; 2) lobbying; and 3) trade association alignment. We will
consider supporting relevant shareholder proposals when a company’s
disclosures are not fully aligned with our expectations outlined
below. |
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| Political
Contributions |
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Political contribution proposals ask issuers to disclose
direct and indirect political spending. State Street Global Advisors
expects investee companies to disclose the following information regarding
political contributions not only through mandated filings, but also on the
company’s own website or corporate responsibility reporting: |
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• All contributions, no matter the dollar value, made by
the company, its subsidiaries, and/ or affiliated Political Action
Committees (PACs) to individual candidates, PACs, and other political
organizations at the state and federal levels in the US;
and |
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• The role of the board in oversight of political
contributions. |
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Corporate Participation in
the Political Process in the United States |
B-161
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| Lobbying |
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Lobbying proposals ask companies to describe the process for
the board’s review of political policies, lobbying expenditures, general
lobbying activities, and selection and engagement of lobbyists. As
investors, we are concerned when lobbying creates potential reputational
risks, for example by contradicting companies’ publicly stated positions
on relevant issues. We believe that board oversight can help mitigate
these risks, as the board is attuned to the company’s values, mission, and
public perception. As such, we expect companies to disclose: |
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• Membership in US trade associations (to which payments
are above $50,000 per year); and |
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• The role of the board in overseeing lobbying
activities. |
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| Trade Association Alignment |
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The latest iteration of
politically-focused shareholder proposals ask that corporate membership in
trade associations be aligned with a company’s stated position on various
environmental and social issues, for example climate change. State Street
Global Advisors evaluates the following when considering such a
proposal: |
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• The board’s role in overseeing the company’s
participation in the political process in the US, including membership in
trade associations; |
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• Whether the company regularly performs a gap analysis of
its stated positions on relevant environmental and/or social issues versus
those of its trade associations; and |
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• Whether the company disclosed a list of its US trade
association memberships (to which payments are above $50,000 per
year). |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions.
And, as pioneers in index, ETF, and ESG investing, we are always inventing
new ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.48 trillion† under our care. |
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* Pensions & Investments
Research Center, as of December 31, 2021. |
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† This figure is presented as of
December 31, 2022 and includes approximately $58.60 billion USD
of assets with respect to SPDR products for which State Street Global
Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing
agent. SSGA FD and State Street Global Advisors are affiliated. Please
note all AUM is unaudited. |
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Corporate Participation in
the Political Process in the United States |
B-162
ssga.com
Marketing communications
State Street Global Advisors
Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global
Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State Street
Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal, Qc, H3A
3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto, Ontario
M5C 3G6. T: +647 775 5900. France: State Street Global Advisors Europe
Limited, France Branch (“State Street Global Advisors France”) is a branch of
State Street Global Advisors Europe Limited, registered in Ireland with company
number 49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global Advisors France is registered in France with company number RCS Nanterre
899 183 289, and its office is located at Coeur Défense — Tour A — La Défense 4,
33e étage, 100, Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex,
France. T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe
Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors Italy is registered in
Italy with company number 11871450968 — REA: 2628603 and VAT number 11871450968,
and its office is located at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39
02 32066 100. F: +39 02 32066 155. Japan: State Street Global Advisors
(Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168,
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Corporate Participation in
the Political Process in the United States |
B-163
Robinson Road, #33-01
Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the
Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Registered with the Register
of Commerce Zurich CHE-105.078.458. T:
+41 (0)44 245 70 00. F: +41 (0)44 245 70 16. United Kingdom: State Street
Global Advisors Limited. Authorised and regulated by the Financial Conduct
Authority. Registered in England. Registered No. 2509928. VAT
No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf,
London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350. United States: State
Street Global Advisors, 1 Iron Street, Boston, MA 02210-1641. T: +1 617 786
3000.
The views expressed in this material are the views of SSGA Asset
Stewardship Team through the period ended March 23, 2023 and are subject to
change based on market and other conditions. This document contains certain
statements that may be deemed forward-looking statements. Please note that
any such statements are not guarantees of any future performance
and actual results or developments may differ materially from
those projected.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without SSGA’s
express written consent.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the current accuracy,
reliability or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon.
You should consult your tax and financial advisor.
The returns on a portfolio of securities which exclude companies
that do not meet the portfolio’s specified ESG criteria may trail the returns on
a portfolio of securities which include such companies. A portfolio’s ESG
criteria may result in the portfolio investing in industry sectors or securities
which underperform the market as a whole.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The trademarks and service marks referenced herein are the
property of their respective owners. Third party data providers make no
warranties or representations of any kind relating to the accuracy, completeness
or timeliness of the data and have no liability
for damages of any kind relating to the use of such data.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence of investment
research (b) is not subject to any prohibition on dealing ahead of the
dissemination of investment research.
© 2023
State Street Corporation.
All Rights Reserved.
ID1487000-3503681.3.1.GBL.RTL 0323
Exp. Date: 03/31/2024
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Corporate Participation in
the Political Process in the United States |
B-164
May
2023
Asset
Stewardship
Guidance
on Diversity Disclosures and Practices
At
State Street Global Advisors, we believe that companies have a responsibility to
effectively manage and disclose risks and opportunities related to diversity,
equity, and inclusion, particularly regarding gender, race, and ethnicity.
Gender diversity has been a priority of State Street Global Advisors’ asset
stewardship program since 2017 and we have been a leader in this area since, as
evidenced by our Fearless Girl campaign. In this Guidance
we set forth our expectations for diversity-related disclosures and how we
integrate those expectations into our asset stewardship and proxy voting
activities.
Information Classification: Limited
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| Our Expectations for Diversity, Equity, and Inclusion
Disclosures |
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Investors can benefit from increased publicly-available
data on diversity, equity, and inclusion at portfolio companies. As such,
we encourage companies to share relevant information with the market, and
we expect all companies in our portfolio to offer public disclosures in
five key areas: |
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1. Board
Oversight Describe how the board executes its role in oversight role
of risks and opportunities related to diversity and inclusion; |
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2. Strategy
Articulate the role diversity (of race, ethnicity, and gender, at
minimum) plays in the company’s broader human capital management practices
and long-term strategy; |
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3. Goals
Describe what diversity, equity, and inclusion-related goals exist,
how these goals contribute to the company’s overall strategy, and how they
are managed and progressing; |
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4. Metrics
Provide measures of the diversity of the company’s global employee
base and board, including: |
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a. Workforce
Employee diversity by race, ethnicity, and gender (at minimum). We
expect to see this information to be broken down by industry-relevant
employment categories or levels of seniority, for all full-time employees.
In the US, companies are expected to at least use the disclosure framework
set forth by the United States Equal Employment Opportunity Commission’s
EEO-1 Survey. Non-US companies are encouraged to
disclose this information in alignment with SASB guidance and nationally
appropriate frameworks; and, |
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b. Board
Diversity characteristics, including racial, ethnic, and gender makeup
(at minimum) of the board of directors; and |
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5. Board
Diversity Articulate goals and strategy related to diverse
representation at the board (including race, ethnicity, and gender, at
minimum), including how the board reflects the diversity of the company’s
workforce, community, customers, and other key stakeholders. |
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| Our Expectations for Pay Equity Disclosures |
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We expect all companies in the US and the UK to provide
public disclosure on: |
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1. Adjusted
pay gaps related to race and gender within the company (Disclosure of the
unadjusted pay gap is also encouraged, but not expected outside of the UK
market at this time); |
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2. Strategy
to achieve and maintain pay equity; and |
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3. Role
of the board in overseeing pay strategies as well as Diversity, Equity and
Inclusion efforts. |
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Classification: Limited Access
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| Civil Rights Risks |
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We expect companies in the US to provide public
disclosure on: |
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1. Risks
related to civil rights, including risks associated with products,
practices, and services; |
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2. Plans
to manage and mitigate these risks; and |
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3. Processes
at the board for overseeing such risks (e.g., committee responsible,
frequency of discussions, etc.). |
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| Expanding the Aperture of
Diversity, Equity, and Inclusion |
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Investors, regulators, and
other stakeholders are increasingly focused on other dimensions of
diversity beyond gender, race, and ethnicity. For example, California
lawmakers and the Nasdaq exchange include LGBTQ-identified individuals in
their perspectives on board diversity. Some advocates are calling for the
prioritization of disability as an essential dimension of diversity, and
several companies (especially outside of the US) already disclose
information regarding the role of people with disabilities in their
organization. We encourage our portfolio companies to consider providing
disclosures about the full diversity of their organization, as these
disclosures are wholly aligned with contributing to the intent to increase
diversity of thought that underlies the present more common focus on
gender, race and ethnic diversity. The reputational and regulatory risk of
not doing so also may increase in the coming years. |
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| Engagements
Incorporating Our Expectations into Conversations with
Companies |
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Since 2021, we have reached
out to 35 of the largest employers in our portfolio each year to have
deeper conversations on human capital management and diversity, equity,
and inclusion. Our aim is to monitor companies’ approaches to these
topics, and encourage alignment with our expectations described
herein. |
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| Voting Incorporating
Our Expectations into Our Proxy Voting Policies |
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In order to achieve
alignment with our aforementioned expectations and advance transparency in
the public markets, State Street Global Advisors has the following proxy
voting guidelines: |
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Race & Ethnicity –— United
States and United Kingdom |
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• If
a company in the Russell 1000 or FTSE 350 does not disclose the racial and
ethnic composition of its board, we will vote against the Chair of the
Nominating Committee. Acceptable disclosures include: |
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—
Aggregate-level (e.g., “5% of our Directors are Black”, “Seven of our
Directors are people of color”, “30% chose not to
self-identify”). |
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—
Individual-level (e.g., “Jane Doe is African-American, John Smith is
Caucasian,” etc.). |
B-167
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Classification: Limited Access
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• If
a company in the S&P 500 or FTSE 100 does not have at least one
director from an underrepresented racial or ethnic community, we will vote
against the Chair of the Nominating Committee. |
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• If
a company in the S&P 500 does not disclose its EEO-1 report, we will vote against the
Chair of the Compensation Committee. Acceptable disclosures
include: |
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—
The original EEO-1 report
response. |
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—
The exact content of the report translated into custom graphics. |
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Gender |
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• We
expect boards of companies in all markets and indices to have at least one
female board member. In markets where we are implementing this policy for
the first time, we may waive the policy if a company engages with State
Street Global Advisors and provides a specific, timebound plan for adding
at least one woman to the board. |
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• In
addition, we expect companies in the Russell 3000, TSX, FTSE 350, STOXX
600, and ASX 300 indices to have boards comprised of at least
30 percent women directors. We may waive the policy if a company
engages with State Street Global Advisors and provides a specific,
timebound plan for reaching 30 percent representation of women
directors. |
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• If
a company fails to meet any of the expectations outlined above, State
Street Global Advisors may vote against the Chair of the Nominating
Committee or the board leader in the absence of a Nominating Committee, if
necessary. Additionally, if a company fails to meet this expectation for
three consecutive years, State Street Global Advisors may vote against all
incumbent members of the Nominating Committee or those persons deemed
responsible for the nomination process. |
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| Shareholder Proposals |
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Below is the approach we follow when voting on
shareholder proposals: |
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• FOR
we will consider voting for shareholder proposals that we believe will
lead to increased alignment with our expectations for diversity-related
disclosures and practices; |
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• ABSTAIN
we will consider voting abstain when we support some elements of a
proposal’s request, or recognize a company’s commitment to implement
related disclosure and/or oversight practices; |
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AGAINST
we will vote against shareholder proposals that we believe are
immaterial, overly prescriptive, or would not further our disclosure and
oversight expectations. |
Information
Classification: Limited Access
B-168
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| Thought Leadership The
Board’s Oversight of Racial and Ethnic Diversity, Equity, and
Inclusion |
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In 2020, State Street
Corporation announced it would be taking “10 Actions to Address
Racism & Inequality.” As part of Action #7, State Street
Global Advisors’ Asset Stewardship team led an internal, cross-functional
workstream to study best practices in board oversight of racial and ethnic
diversity, equity, and inclusion. We partnered with Russell Reynolds
Associates and the Ford Foundation to interview 27 directors of FTSE 100
and S&P 500 multinational corporations, culminating in a report titled
“The Board’s Oversight of Racial and Ethnic Diversity, Equity and
Inclusion.” |
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| Conclusion |
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We remain focused on our
fiduciary duty to maximize the long-term shareholder value of our clients’
investments. We believe that teams with a diversity of perspectives
generate a diversity of ideas that can drive the long-term success of a
firm. Please reach out to our Asset Stewardship team at
[email protected]. We look forward to engaging with you on
this important topic. |
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| About State Street Global
Advisors |
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State Street Global
Advisors serves governments, institutions and financial advisors with a
rigorous approach, breadth of capabilities and belief that good
stewardship is good investing for the long term. Pioneers in index, ETF,
and ESG investing and the world’s fourth-largest asset manager*, we are
always inventing new ways to invest. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
Information
Classification: Limited Access
B-169
ssga.com
State
Street Global Advisors
Marketing
Communications
Worldwide
Entities
Abu
Dhabi: State Street Global Advisors Limited, ADGM branch is regulated
by the Financial Services Regulatory Authority (FSRA).
This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority.
T:
+971 2 245 9000. Australia: State Street Global Advisors, Australia,
Limited (ABN 42 003 914 225) is the holder of an Australian Financial Services
License (AFSL Number 238276). Registered office: Level 14, 420 George
Street, Sydney, NSW 2000, Australia.
T:
+612 9240-7600. F: +612 9240-7611. Belgium: State Street Global Advisors
Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T: +32 2 663 2036.
State Street Global Advisors Belgium is a branch office of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose
registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State Street
Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal,
Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto,
Ontario M5C 3G6. T: +647 775 5900. France: State Street Global Advisors
Europe Limited, France Branch (“State Street Global
Advisors
France”) is a branch of State Street Global Advisors Europe Limited, registered
in Ireland with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located at Coeur
Défense — Tour A — La Défense 4, 33e étage, 100, Esplanade du Général de Gaulle,
92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44 45 41
92. Germany: State Street Global Advisors Europe Limited, Branch in
Germany, Brienner Strasse 59, D-80333
Munich, Germany (“State Street Global Advisors Germany”). T: +49 (0)89 55878
400. State Street Global Advisors Germany is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin
2.
Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000.
F:
+353 (0)1 776 3300. Italy: State Street Global Advisors Europe Limited,
Italy Branch (“State Street Global Advisors Italy”) is a branch of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street
Global
Advisors Italy is registered in Italy with company number
11871450968
— REA: 2628603 and VAT number 11871450968, and its office is located at Via
Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39 02 32066
155. Japan: State Street Global Advisors (Japan) Co., Ltd., Toranomon
Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands:
State
Street Global Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg
29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global
Advisors Netherlands is a branch office of State Street Global Advisors Europe
Limited, registered in Ireland with company number 49934, authorised and
regulated by the Central Bank of Ireland, and whose registered office is at 78
Sir John Rogerson’s Quay, Dublin 2. Singapore: State Street Global
Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. South Africa: State Street Global Advisors Limited
is regulated by the Financial Sector Conduct Authority in South Africa under
license number 42670. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors, 1 Iron
Street, Boston, MA 02210-1641. T: +1 617 786 3000.
Information
Classification: Limited Access
B-170
Important
Risk Information
The
views expressed in this material are the views of SSGA Asset Stewardship Team
through the period ended May 26, 2023 and are subject to change based on
market and other conditions. This document contains certain statements that may
be deemed forward-looking statements. Please note that any such statements are
not guarantees of any future performance and actual results or developments may
differ materially from those projected.
Investing
involves risk including the risk of loss of principal.
The
whole or any part of this work may not be reproduced, copied or transmitted or
any of its contents disclosed to third parties without SSGA’s express written
consent.
All
information is from SSGA unless otherwise noted and has been obtained from
sources believed to be reliable, but its accuracy is not guaranteed. There is no
representation or warranty as to the current accuracy, reliability or
completeness of, nor liability for, decisions based on such information and it
should not be relied on as such.
The
information provided does not constitute investment advice and it should not be
relied on as such. It should not be considered a solicitation to buy or an offer
to sell a security. It does not take into account any investor’s particular
investment objectives, strategies, tax status or investment horizon.
The
returns on a portfolio of securities which exclude companies that do not meet
the portfolio’s specified ESG criteria may trail the returns on a portfolio of
securities which
include
such companies. A portfolio’s ESG criteria may result in the portfolio investing
in industry sectors or securities which underperform the market as a whole.
This
communication is directed at professional clients (this includes eligible
counterparties as defined by the appropriate EU regulator) who are deemed both
knowledgeable and experienced in matters relating to investments. The products
and services to which this communication relates are only available to such
persons and persons of any other description (including retail clients) should
not rely on this communication.
The
trademarks and service marks referenced herein are the property of their
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of the data and have no liability
for
damages of any kind relating to the use of such data.
The
information contained in this communication is not a research
recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in
Financial Instruments Directive (2014/65/EU) or applicable Swiss
regulation. This means that this marketing communication
(a) has not been prepared in accordance with
legal requirements designed to promote the independence of
investment research (b) is not subject to any
prohibition on dealing ahead of the dissemination of
investment research
© 2023 State Street
Corporation.
All
Rights Reserved. ID1483220-3383057.7.1.GBL.RTL 0323 Exp. Date: 06/30/2024
Information
Classification: Limited Access
B-171
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May
2023
Asset
Stewardship
Guidance
on Human Capital Management Disclosures & Practices
In
2021, State Street Global Advisors’ Asset Stewardship team sought to
strengthen our perspective on human capital management. We conducted over
185 engagements with investee companies on this topic in markets across
the world, including a proactive engagement campaign targeting the largest
employers in our portfolios. Our team also initiated conversations with
experts on the topic of human capital management to enhance our
understanding of this essential topic.
Our
intended outcome through these engagements was to develop expectations for
companies’ disclosures on human capital management, and to share our
insights regarding best practices and areas for improvement for portfolio
companies (please see our complementary Human Capital Management
Insights page for more on this topic). |
Information
Classification: Limited
Access
B-172
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| Our Expectations for Human Capital Management
Disclosures |
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While there are many material dimensions of human
capital management, our engagements and analysis suggest that five areas
are particularly meaningful components of a successful human capital
management strategy across industries. As a starting point, we expect all
companies to provide public disclosure on:: |
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1. Board Oversight Methods outlining how the
board oversees human capital-related risks and opportunities; |
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2. Strategy Approaches to human capital
management and how these advance the long-term business strategy; |
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3. Compensation Strategies throughout the
organization that aim to attract and retain employees, and incentivize
contribution to an effective human capital strategy; |
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4. Voice Channels to ensure the concerns and
ideas from workers are solicited and acted upon, and how the workforce is
engaged and empowered in the organization; and |
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5. Diversity, equity, and inclusion Efforts to
advance diversity, equity, and inclusion (see our complementary Guidance on Diversity Disclosures and
Practices for additional context). |
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We expect public disclosures to contain specific
information about these essential dimensions of human capital management.
For example, instead of disclosing that “employees are surveyed
regularly,” companies could consider describing survey frequency, examples
of questions asked, and actions taken in response to employee feedback
where relevant. |
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We
understand that this is an evolving topic and we will continue to engage
with companies to develop our expectations and inform our stewardship
efforts in this space. We also encourage companies to consider emerging
disclosure frameworks, including those required by regulators.
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Voting
Incorporating
Our Expectations into Our Proxy Voting and Engagement
Practices |
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With
respect to voting on shareholder proposals related to human capital
management , we will first engage with companies related to our human
capital management-related disclosure and oversight expectations outlined
herein, focusing on companies and industries with the greatest risk and
opportunity.
Below
is the approach when voting on human capital management-related
shareholder proposals:
• FOR
We will consider voting for shareholder proposals that we believe will
lead to increased alignment with our expectations for human
capital-related disclosures and oversight; |
Information
Classification: Limited Access
B-173
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• ABSTAIN
We will consider voting abstain when we support some elements of a
proposal’s request, or recognize a company’s commitment to implement
related disclosure and/or oversight practices. |
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• AGAINST
We will vote against shareholder proposals that we believe are
immaterial, overly prescriptive or would not further our disclosure and
oversight expectations. |
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For
more information on our voting policies related to diversity, equity, and
inclusion, please see our Guidance on Diversity
Disclosures & Practices. For example, we will take
voting action against chairs of the Nominating Committees at S&P 500
companies that do not disclose EEO-1 reports.
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Thought
Leadership
Human
Capital Management Insights |
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As
part of our increased focus on human capital management, we conducted over
150 engagements on this topic in markets across the world in 2021,
including a proactive engagement campaign targeting 60 of the largest
employers in our portfolio across the Americas, EMEA, and APAC regions.
Please see our Human Capital Management Insights for insights from
these engagements.
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| Conclusion |
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We encourage companies in
our portfolios to align their disclosures and practices with our
expectations. Please reach out to State Street Global Advisors’ Asset
Stewardship Team at [email protected] to request an
engagement on this important topic. |
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For
additional context regarding our perspective on labor rights as an
essential dimension of human rights, please see our Guidance on Human
Rights Disclosures & Practices.
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| About State Street Global
Advisors |
|
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|
For four decades, State
Street Global Advisors has served the world’s governments, institutions
and financial advisors. With a rigorous, risk-aware approach built on
research, analysis and market-tested experience, we build from a breadth
of index and active strategies to create cost-effective solutions. And, as
pioneers in index, ETF, and ESG investing, we are always inventing new
ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.62 trillion† under our care. |
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*
Pensions & Investments Research Center, as of December 31,
2021.
† This figure is
presented as of March 31, 2023 and includes approximately
$65.03 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. Please note all AUM is unaudited. |
B-174
Information
Classification: Limited Access
ssga.com
Marketing
communication
State
Street Global Advisors Worldwide Entities
Abu
Dhabi: State Street Global Advisors Limited, ADGM branch is regulated by the
Financial Services Regulatory Authority (FSRA). This document is intended for
Professional Clients or Market Counterparties only as defined by the FSRA and no
other person should act upon it. State Street Global Advisors Limited, ADGM
Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM Square, Al Maryah
Island, P.O Box 76404, Abu Dhabi, United Arab Emirates. Regulated by the ADGM
Financial Services Regulatory Authority. T: +971 2 245 9000. Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the
holder of an Australian Financial Services License (AFSL Number 238276).
Registered office: Level 14, 420 George Street, Sydney, NSW 2000,
Australia. T: +612 9240-7600. F: +612 9240- 7611. Belgium: State Street
Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T:
+32 2 663 2036. State Street Global Advisors Belgium is a branch office of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Canada:
State Street Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500,
Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street East Suite
800, Toronto, Ontario M5C 3G6. T: +647 775 5900. France: State Street
Global Advisors Europe Limited, France Branch (“State Street Global Advisors
France”) is a branch of State Street Global Advisors Europe Limited, registered
in Ireland with company number 49934, authorised and regulated by the Central
Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located at Coeur
Défense — Tour A — La Défense 4, 33e étage, 100, Esplanade du Général de Gaulle,
92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44 45
41 92. Germany: State Street Global Advisors Europe Limited, Branch in
Germany, Brienner Strasse 59, D-80333
Munich, Germany (“State Street Global Advisors Germany”). T: +49 (0)89 55878
400. State Street Global Advisors Germany is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Hong Kong: State
Street Global Advisors Asia Limited,
68/F,
Two International Finance Centre, 8 Finance Street, Central, Hong Kong.
T: +852 2103-0288. F: +852 2103-0200. Ireland: State Street Global
Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered
office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number:
49934.
T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global
Advisors Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is
a branch of State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. State Street Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39
02 32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands,Apollo Building
7th
floor, Herikerbergweg 29, 1101 CN Amsterdam, Netherlands. T: +31 20 7181 000.
State Street Global Advisors Netherlands is a branch office of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. Singapore: State
Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. South Africa: State Street Global Advisors Limited
is regulated by the Financial Sector Conduct Authority in South Africa under
license number 42670.United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F:
020 3395 6350. United States: State Street Global Advisors,
1 Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
Information
Classification: Limited Access
B-175
Important
Risk Information
Investing
involves risk including the risk of loss of principal. The returns on a
portfolio of securities which exclude companies that do not meet the portfolio’s
specified ESG criteria may trail the returns on a portfolio of securities which
include such companies.
A
portfolio’s ESG criteria may result in the portfolio investing in industry
sectors or securities which underperform the market as a whole.
The
views expressed in this material are the views of SSGA Asset Stewardship Team
through the period ended May 26, 2023 and are subject to change based on
market and other conditions. This document contains certain statements that may
be deemed forward-looking statements. Please note that
any
such statements are not guarantees of any future performance and actual results
or developments may differ materially from those projected.
The
information contained in this communication is not a research recommendation or
‘investment research’ and is classified as a ‘Marketing Communication’ in
accordance with the Markets in Financial Instruments Directive (2014/65/EU) or
applicable Swiss regulation. This means that this marketing communication
(a) has not been prepared in accordance with legal requirements designed to
promote the independence of investment research (b) is not subject to any
prohibition on dealing ahead of the dissemination of investment research.
This
communication is directed at professional clients (this includes eligible
counterparties as defined by the appropriate EU regulator) who are deemed both
knowledgeable and experienced in matters relating to investments. The products
and services to which this communication relates are only available to such
persons and persons of any other description (including retail clients) should
not rely on this communication.
The
information provided does not constitute investment advice and it should not be
relied on as such. It should not be considered a solicitation to buy or an offer
to sell a security. It does not take into account any investor’s particular
investment objectives, strategies, tax status or investment horizon. You should
consult your tax and financial advisor.
All
information is from SSGA unless otherwise noted and has been obtained from
sources believed to be reliable, but its accuracy is not guaranteed. There is no
representation or warranty as to the current accuracy, reliability or
completeness of, nor liability for, decisions based on such information and it
should not be relied on as such. The whole or any part of this work may not be
reproduced, copied or transmitted or any of its contents disclosed to third
parties without State Street Global Advisors’ express written consent.
© 2023 State Street
Corporation.
All
Rights Reserved.
ID1483214-
4044335.4.1.GBL.RTL 0423
Exp.
Date: 06/30/2024
Information
Classification: Limited Access
B-176
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Insights
Asset Stewardship |
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Guidance on Effective Board
Oversight |
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March 2023 |
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As stewards of near-permanent capital to thousands of public
companies across the world, State Street Global Advisors focuses on risks
and opportunities that may impact long-term value creation for our
clients. We rely on the elected representatives of the companies in which
we invest — the board of directors — to oversee these firms’ strategies.
We expect effective independent board oversight of the material risks and
opportunities to its business and operations. We believe that appropriate
consideration of these risks and opportunities is an essential component
of a firm’s long-term business strategy, and expect boards to actively
oversee the management of this strategy.
This paper provides guidance to our portfolio companies on
how we evaluate the effectiveness of the board oversight of the risks and
opportunities and should be read in conjunction with our Global Proxy
Voting and Engagement Principles and applicable regional proxy voting and
engagement guidelines. It also outlines our approach to incorporating
these perspectives into our voting and
engagement. |
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B-177
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| Guidance On Effective Board
Oversight |
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When
evaluating a board’s oversight of financially material risks and
opportunities, we assess the following factors, based on disclosures and
engagements with directors. |
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Oversees Long-term
Strategy |
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• Articulates the material risks and opportunities and how
those risks and opportunities fit into the firm’s long-term business
strategy |
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• Regularly assesses the effectiveness of the company’s
long-term strategy, and management’s execution of this
strategy |
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For example, we leverage established
frameworks, such as The Sustainability Accounting Standards Board (SASB)
Materiality Map to inform our views on the materiality of environmental
and social issues at a given company. We have also established the
following priorities for proxy voting and engagement: Effective Board
Oversight; Climate Risk Management; Human Capital Management; and
Diversity, Equity & Inclusion. |
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Demonstrates an Effective
Oversight Process |
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• Describes which committee(s) have oversight over specific
risks and opportunities, as well as which topics are overseen and/or
discussed at the full-board level |
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• Includes risks and opportunities in board and/or
committee agendas, and articulates how often specific topics are discussed
at the committee and/or full-board level |
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• Utilizes KPIs or metrics to assess the effectiveness of
risk management processes |
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• Engages with key stakeholders including employees and
investors |
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Ensures Effective
Leadership |
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• Holds management accountable for progress on relevant
metrics and targets |
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• Integrates necessary skills and perspectives into the
board nominating and executive hiring processes, and provides training to
directors and executives, including on topics material to the company’s
business or operations |
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• Conducts a periodic effectiveness
review |
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Guidance on Effective
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B-178
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Ensures Disclosures of Material
Information |
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• Ensures publication of relevant disclosures, including
those regarding material topics |
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— For example, we expect companies to disclose against the
four pillars of the Task Force on Climate-related Financial Disclosures
(TCFD) framework |
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| Incorporating our Expectations
for Effective Oversight Into our Proxy Voting and Engagement
Practices |
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As responsible stewards, we believe in the importance of
effective risk management and oversight of issues that are material to a
company. To effectively assess the risk of our clients’ portfolios and the
broader market, we expect our portfolio companies to manage risks and
opportunities that are material and industry-specific and that have a
demonstrated link to long-term value creation, and to provide high-quality
disclosure of this process to shareholders.
Consistent with this perspective, we may seek to engage with
our portfolio companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the directors responsible. |
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| Next Steps For
Directors |
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We
encourage directors to review our existing guidance, as well as our voting
guidelines, all of which can be found on our website. We believe
regular engagements with directors is an essential component of successful
long-term partnerships with our portfolio companies. Please reach out to
the Asset Stewardship team at [email protected] to request an
engagement or share your ideas on effective board oversight. |
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| About State Street Global
Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions.
And, as pioneers in index, ETF, and ESG investing, we are always inventing
new ways to invest. As a result, we have become the world’s fourth-largest
asset manager* with US $3.48 trillion† under our care. |
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* Pensions & Investments Research Center, as of
December 31, 2021. |
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† This figure is presented as of December 31, 2022 and
includes approximately $58.60 billion USD of assets with respect to
SPDR products for which State Street Global Advisors Funds Distributors,
LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street
Global Advisors are affiliated. Please note all AUM is
unaudited. |
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Guidance on Effective
Board Oversight |
B-179
ssga.com
Marketing communication
State Street Global Advisors Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM Square, Al Maryah
Island, P.O Box 76404, Abu Dhabi, United Arab Emirates. Regulated by the ADGM
Financial Services Regulatory Authority. T: +971 2 245 9000. Australia:
State Street Global Advisors, Australia, Limited (ABN 42 003 914 225) is the
holder of an Australian Financial Services License (AFSL Number 238276).
Registered office: Level 14, 420 George Street, Sydney, NSW 2000,
Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State Street
Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels, Belgium. T:
+32 2 663 2036. State Street Global Advisors Belgium is a branch office of State
Street Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is
at 78 Sir John Rogerson’s Quay, Dublin 2. Canada: State
Street Global Advisors, Ltd., 1981 McGill College Avenue, Suite 500, Montreal,
Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide Street East Suite 800, Toronto,
Ontario M5C 3G6. T: +647 775 5900. France: State Street Global
Advisors Europe Limited, France Branch (“State Street Global Advisors France”)
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. State Street Global Advisors France is registered in France with
company number RCS Nanterre 899 183 289, and its office is located at Coeur
Défense – Tour A – La Défense 4, 33e étage, 100, Esplanade du Général de Gaulle,
92 931 Paris La Défense Cedex, France. T: +33 1 44 45 40 00. F: +33 1 44 45 41
92. Germany: State Street Global Advisors Europe Limited, Branch in
Germany, Brienner Strasse 59, D-80333
Munich, Germany (“State Street Global Advisors Germany”). T: +49 (0)89 55878
400. State Street Global Advisors Germany is a branch of State
Street Global Advisors Europe Limited, registered in Ireland with company number
49934, authorised and regulated by the Central Bank of Ireland, and whose
registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. Hong Kong:
State Street Global Advisors Asia Limited, 68/F, Two International Finance
Centre, 8 Finance Street, Central, Hong Kong. T: +852 2103-0288. F: +852
2103-0200. Ireland: State Street Global Advisors Europe Limited is
regulated by the Central Bank of Ireland. Registered office address 78 Sir John
Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F:
+353 (0)1 776 3300. Italy: State Street Global Advisors Europe Limited,
Italy Branch (“State Street Global Advisors Italy”) is a branch of State Street
Global Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
Italy is registered in Italy with company number
11871450968 – REA: 2628603 and VAT number 11871450968, and its
office is located at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02
32066 100. F: +39 02 32066 155. Japan: State Street Global Advisors
(Japan) Co., Ltd., Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’
Association. Netherlands: State Street Global Advisors
Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN Amsterdam,
Netherlands. T: +31 20 7181 000. State Street Global Advisors Netherlands is a
branch office of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Singapore: State Street Global Advisors
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Guidance on Effective
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B-180
Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912
(Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore).
T: +65 6826-7555. F: +65 6826-7501. Switzerland: State Street Global
Advisors AG, Beethovenstr. 19, CH-8027
Zurich. Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors Limited.
Authorised and regulated by the Financial Conduct Authority. Registered in
England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395
6000. F: 020 3395 6350. United States: State Street Global Advisors,
1 Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
Important Risk Information
Investing involves risk including the risk of loss of principal.
The returns on a portfolio of securities which exclude
companies that do not meet the portfolio’s specified ESG criteria
may trail the returns on a portfolio of securities which include such companies.
A portfolio’s ESG criteria may result in the portfolio investing in industry
sectors or securities which underperform the market as a whole.
Responsible-Factor (R Factor) scoring is designed by State Street
to reflect certain ESG characteristics and does not represent investment
performance. Results generated out of the scoring model is based on
sustainability and corporate governance dimensions of a scored entity.
The information contained in this communication is not a
research recommendation or ‘investment research’ and is classified as a
‘Marketing Communication’ in accordance with the Markets in Financial
Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means
that this marketing communication (a) has not been prepared in accordance
with legal requirements designed to promote the independence
of investment research (b) is not subject to any
prohibition on dealing ahead of the dissemination of investment research.
This communication is directed at professional clients (this
includes eligible counterparties as defined by the appropriate EU regulator) who
are deemed both knowledgeable and experienced in matters relating to
investments. The products and services to which this communication relates are
only available to such persons and persons of any other description (including
retail clients) should not rely on this communication.
The information provided does not constitute investment advice and
it should not be relied on as such. It should not be considered a solicitation
to buy or an offer to sell a security. It does not take into account any
investor’s particular investment objectives, strategies, tax status or
investment horizon. You should consult your tax and financial advisor.
All information is from SSGA unless otherwise noted and has been
obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation or warranty as to the
current accuracy, reliability or completeness of, nor liability for, decisions
based on such information and it should not be relied on as such.
The whole or any part of this work may not be reproduced, copied
or transmitted or any of its contents disclosed to third parties without State
Street Global Advisors’ express written consent.
© 2023
State Street Corporation.
All Rights Reserved.
ID1519201-5596229.1.2.GBL.RTL 0423
Exp. Date: 03/31/2024
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Guidance on Effective
Board Oversight |
B-181
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Insights
Asset Management
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Guidance on Virtual
Shareholder Meetings |
| April 2023 |
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As shareholder meetings have increasingly been held
virtually due to the pandemic, our Asset Stewardship team outlines our
voting approach to management proposals on this topic, expectations for
shareholder engagement best practices and guidance on preserving robust
shareholder rights.
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As a result of the COVID-19 pandemic, companies are
increasingly holding virtual shareholder meetings (“VSMs”) globally. Many
companies are proposing amendments to their governing documents that grant
the board the ability to host VSMs at their own discretion in
perpetuity. |
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Recognizing the success of virtual
and hybrid shareholder meetings and a shifting regulatory environment, we
will generally support proposals that grant boards the right to hold
shareholder meetings in a virtual or hybrid format as long as companies
uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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If a company breaches of any of the
criteria above, we may vote against the Chair of the nominating
committee. |
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Our evaluation of these proposals
will also consider the operating environment of the company, including
local regulatory developments and specific market circumstances impacting
virtual meeting practices. |
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B-182
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While we are encouraged by the
success of VSMs thus far,, companies and shareholders must remain vigilant
in continuing to improve their VSM practices. Maintaining a strong level
of shareholder dialogue, upholding shareholder rights, and leveraging the
virtual format to benefit companies and investors will be
essential. |
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| About
State Street Global Advisors |
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Our clients are the world’s
governments, institutions and financial advisors. To help them achieve
their financial goals we live our guiding principles each and every
day: |
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• Start with rigor |
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• Build from breadth |
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• Invest as stewards |
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• Invent the future |
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For four decades, these principles have
helped us be the quiet power in a tumultuous investing world. Helping
millions of people secure their financial futures. This takes each of our
employees in 29 offices around the world, and a firm-wide conviction that we can always
do it better. As a result, we are the world’s fourth-largest asset
manager* with US $3.62 trillion† under our care. |
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* Pensions & Investments
Research Center, as of December 31, 2021. |
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† This figure is presented as of
March 31, 2023 and includes approximately $65.03 billion USD of
assets with respect to SPDR products for which State Street Global
Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing
agent. SSGA FD and State Street Global Advisors are affiliated. Please
note all AUM is unaudited. |
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Guidance on Virtual
Shareholder Meetings |
B-183
ssga.com
Marketing communication
State Street Global Advisors
Worldwide Entities
Abu Dhabi: State Street Global Advisors Limited, ADGM
branch is regulated by the Financial Services Regulatory Authority (FSRA). This
document is intended for Professional Clients or Market Counterparties only as
defined by the FSRA and no other person should act upon it. State Street Global
Advisors Limited, ADGM Branch, Al Khatem Tower, Suite 42801, Level 28, ADGM
Square, Al Maryah Island, P.O Box 76404, Abu Dhabi, United Arab Emirates.
Regulated by the ADGM Financial Services Regulatory Authority. T: +971 2 245
9000. Australia: State Street Global Advisors, Australia, Limited (ABN 42
003 914 225) is the holder of an Australian Financial Services License (AFSL
Number 238276). Registered office: Level 14, 420 George Street, Sydney, NSW
2000, Australia. T: +612 9240-7600. F: +612 9240-7611. Belgium: State
Street Global Advisors Belgium, Chaussée de La Hulpe 185, 1170 Brussels,
Belgium. T: +32 2 663 2036. State Street Global Advisors Belgium is a branch
office of
State Street Global Advisors Europe Limited, registered in Ireland
with company number 49934, authorised and regulated by the Central Bank of
Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin
2. Canada: State Street Global Advisors, Ltd., 1981 McGill College
Avenue, Suite 500, Montreal, Qc, H3A 3A8, T: +514 282 2400 and 30 Adelaide
Street East Suite 800, Toronto, Ontario M5C 3G6. T: +647 775 5900.
France: State Street Global Advisors Europe Limited, France Branch
(“State Street Global Advisors France”) is a branch of State Street Global
Advisors Europe Limited, registered in Ireland with company number 49934,
authorised and regulated by the Central Bank of Ireland, and whose registered
office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors
France is registered in France with company number RCS Nanterre 899 183 289, and
its office is located at Coeur Défense — Tour A — La Défense 4, 33e étage, 100,
Esplanade du Général de Gaulle, 92 931 Paris La Défense Cedex, France.
T: +33 1 44 45 40 00. F: +33 1 44 45 41 92. Germany: State Street
Global Advisors Europe
Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich, Germany (“State Street Global
Advisors Germany”). T: +49 (0)89 55878 400. State Street Global Advisors Germany
is a branch of State Street Global Advisors Europe Limited, registered in
Ireland with company number 49934, authorised and regulated by the Central Bank
of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay,
Dublin 2. Hong Kong: State Street Global Advisors Asia Limited, 68/F, Two
International Finance Centre, 8 Finance Street, Central, Hong Kong. T: +852
2103-0288. F: +852 2103-0200. Ireland: State Street Global Advisors
Europe Limited is regulated by the Central Bank of Ireland. Registered office
address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353
(0)1 776 3000. F: +353 (0)1 776 3300. Italy: State Street Global Advisors
Europe Limited, Italy Branch (“State Street Global Advisors Italy”) is a branch
of State Street Global Advisors Europe Limited, registered in Ireland with
company number 49934, authorised and regulated by the Central Bank of Ireland,
and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State
Street
Global Advisors Italy is registered in Italy with company number
11871450968 — REA: 2628603 and VAT number 11871450968, and its office is located
at Via Ferrante Aporti, 10 -20125 Milan, Italy. T: +39 02 32066 100. F: +39
02 32066 155. Japan: State Street Global Advisors (Japan) Co., Ltd.,
Toranomon Hills Mori Tower 25F 1-23-1 Toranomon, Minato-ku, Tokyo 105-6325 Japan. T: +81-3-4530-7380. Financial Instruments
Business Operator, Kanto Local Financial Bureau (Kinsho #345), Membership: Japan
Investment Advisers Association, The Investment Trust Association, Japan, Japan
Securities Dealers’ Association. Netherlands: State Street Global
Advisors Netherlands, Apollo Building 7th floor, Herikerbergweg 29, 1101 CN
Amsterdam, Netherlands. T: +31 20 7181 000. State Street Global Advisors
Netherlands is a branch office of State Street Global Advisors Europe Limited,
registered in Ireland with company number 49934, authorised and regulated by the
Central Bank of Ireland, and whose registered office is at 78 Sir John
Rogerson’s Quay, Dublin 2. Singapore: State Street Global Advisors
Singapore Limited, 168,
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Guidance on Virtual
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B-184
Robinson Road, #33-01
Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by
the Monetary Authority of Singapore). T: +65 6826-7555.
F: +65 6826-7501. Switzerland: State Street Global Advisors
AG, Beethovenstr. 19, CH-8027 Zurich.
Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F:
+41 (0)44 245 70 16. United Kingdom: State Street Global Advisors
Limited. Authorised and regulated by the Financial Conduct Authority. Registered
in England. Registered No. 2509928. VAT No. 5776591 81. Registered
office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395
6000. F: 020 3395 6350. United States: State Street Global
Advisors, 1 Iron Street, Boston, MA 02210-1641. T: +1 617 786 3000.
The whole or any part of this work may not be reproduced, copied
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Street Global Advisors’ express
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The information provided does not constitute investment advice and
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All Rights Reserved.
ID1522584-4255954.3.1.GBL.RTL 0423
Exp. Date: 04/30/2024
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B-185
TABLE OF CONTENTS
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Coverage
The
U.S. research team provides proxy analyses and voting recommendations for the
common shareholder meetings of U.S. - incorporated companies that are
publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are
held in our institutional investor clients’ portfolios. Coverage generally
includes corporate actions for common equity holders, such as written consents
and bankruptcies. ISS’ U.S. coverage includes investment companies (including
open-end funds, closed-end funds, exchange-traded funds, and
unit investment trusts), limited partnerships (“LPs”), master limited
partnerships (“MLPs”), limited liability companies (“LLCs”), and business
development companies. ISS reviews its universe of coverage on an annual basis,
and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated
companies
In
addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are
applied to certain foreign-incorporated company analyses. Like the SEC, ISS
distinguishes two types of companies that list but are not incorporated in the
U.S.:
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U.S. Domestic Issuers – which have a majority of outstanding
shares held in the U.S. and meet other criteria, as determined by the SEC,
and are subject to the same disclosure and listing standards as U.S.
incorporated companies (e.g. they are required to file DEF14A proxy
statements) – are generally covered under standard U.S. policy guidelines.
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Foreign Private Issuers
(FPIs) – which are allowed to take exemptions from most disclosure
requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S.
listing standards – are generally covered under a combination of policy
guidelines: |
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FPI Guidelines (see the Americas
Regional Proxy Voting Guidelines), may apply to companies
incorporated in governance havens, and apply certain minimum independence
and disclosure standards in the evaluation of key proxy ballot items, such
as the election of directors; and/or |
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Guidelines for the market that is responsible for, or most
relevant to, the item on the ballot. |
U.S.
incorporated companies listed only on non-U.S. exchanges are generally covered
under the ISS guidelines for the market on which they are traded.
An
FPI is generally covered under ISS’ approach to FPIs outlined above, even if
such FPI voluntarily files a proxy statement and/or other filing normally
required of a U.S. Domestic Issuer, so long as the company retains its FPI
status.
In
all cases – including with respect to other companies with cross-market features
that may lead to ballot items related to multiple markets – items that are on
the ballot solely due to the requirements of another market (listing,
incorporation, or national code) may be evaluated under the policy of the
relevant market, regardless of the
“assigned”
primary market coverage.
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1. Board of Directors
Voting on Director Nominees in Uncontested
Elections
Four
fundamental principles apply when determining votes on director nominees:
Independence: Boards should be sufficiently independent from
management (and significant shareholders) to ensure that they are able and
motivated to effectively supervise management’s performance for the benefit of
all shareholders, including in setting and monitoring the execution of corporate
strategy, with appropriate use of shareholder capital, and in setting and
monitoring executive compensation programs that support that strategy. The chair
of the board should ideally be an independent director, and all boards should
have an independent leadership position or a similar role in order to help
provide appropriate counterbalance to executive management, as well as having
sufficiently independent committees that focus on key governance concerns such
as audit, compensation, and nomination of directors.
Composition: Companies should ensure that directors add value to
the board through their specific skills and expertise and by having sufficient
time and commitment to serve effectively. Boards should be of a size appropriate
to accommodate diversity, expertise, and independence, while ensuring active and
collaborative participation by all members. Boards should be sufficiently
diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor input, such as
that expressed through significant opposition to management proposals,
significant support for shareholder proposals (whether binding or non-binding), and tender offers where a
majority of shares are tendered.
Accountability: Boards should be sufficiently accountable to
shareholders, including through transparency of the company’s governance
practices and regular board elections, by the provision of sufficient
information for shareholders to be able to assess directors and board
composition, and through the ability of shareholders to remove directors.
General
Recommendation: Generally vote for
director nominees, except under the following circumstances (with new
nominees1 considered on case-by-case basis):
Independence
Vote
against2 or withhold from non-independent directors (Executive
Directors and Non-Independent Non-Executive Directors per ISS’ Classification
of Directors) when:
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Independent directors comprise 50 percent or less of the
board; |
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The non-independent
director serves on the audit, compensation, or nominating committee;
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The company lacks an audit, compensation, or nominating
committee so that the full board functions as that committee; or
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The company lacks a formal nominating committee, even if the
board attests that the independent directors fulfill the functions of such
a committee. |
1 A “new nominee” is a
director who is being presented for election by shareholders for the first time.
Recommendations on new nominees who have served for less than one year are made
on a case-by-case basis depending on the
timing of their appointment and the problematic governance issue in question.
2 In general, companies
with a plurality vote standard use “Withhold” as the contrary vote option in
director elections; companies with a majority vote standard use “Against”.
However, it will vary by company and the proxy must be checked to determine the
valid contrary vote option for the particular company.
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ISS Classification of Directors – U.S.
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1.1. |
Current officer1 of the company
or one of its affiliates2.
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2. |
Non-Independent
Non-Executive Director |
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2.1. |
Director identified as not independent by the board.
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Controlling/Significant |
Shareholder |
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2.2. |
Beneficial owner of more than 50 percent of the company’s
voting power (this may be aggregated if voting power is distributed among
more than one member of a group). |
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Current Employment at Company or Related Company |
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2.3. |
Non-officer employee
of the firm (including employee representatives). |
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2.4. |
Officer1, former
officer, or general or limited partner of a joint venture or partnership
with the company. |
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2.5. |
Former CEO of the company. 3, 4 |
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2.6. |
Former non-CEO
officer1
of the company or an affiliate2 within the
past five years. |
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2.7. |
Former officer1 of an acquired
company within the past five years.4
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2.8. |
Officer1
of a former parent or predecessor firm at the time the
company was sold or split off within the past five years.
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2.9. |
Former interim officer if the service was longer than 18
months. If the service was between 12 and 18 months an assessment of the
interim officer’s employment agreement will be made.5
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2.10. |
Immediate family member6 of a current
or former officer1
of the company or its affiliates2 within the
last five years. |
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2.11. |
Immediate family member6 of a current
employee of company or its affiliates2 where
additional factors raise concern (which may include, but are not limited
to, the following: a director related to numerous employees; the company
or its affiliates employ relatives of numerous board members; or a non- Section 16 officer in a key
strategic role). |
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Professional, Transactional, and Charitable Relationships |
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2.12. |
Director who (or whose immediate family member6) currently
provides professional services7 in excess of
$10,000 per year to: the company, an affiliate2, or an
individual officer of the company or an affiliate; or who is (or whose
immediate family member6 is) a partner,
employee, or controlling shareholder of an organization which provides the
services. |
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2.13. |
Director who (or whose immediate family member6) currently has
any material transactional relationship8 with the
company or its affiliates2; or who is (or
whose immediate family member6 is) a partner
in, or a controlling shareholder or an executive officer of, an
organization which has the material transactional relationship8 (excluding
investments in the company through a private placement).
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2.14. |
Director who (or whose immediate family member6) is a
trustee, director, or employee of a charitable or non-profit organization that receives
material grants or endowments8 from the
company or its affiliates2.
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2.15. |
Party to a voting agreement9 to vote in
line with management on proposals being brought to shareholder vote.
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2.16. |
Has (or an immediate family member6 has) an
interlocking relationship as defined by the SEC involving members of the
board of directors or its Compensation Committee.10
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2.17. |
Founder11 of the
company but not currently an employee. |
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2.18. |
Director with pay comparable to Named Executive Officers.
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2.19. |
Any material12 relationship
with the company. |
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3.1. |
No material12 connection to
the company other than a board seat. |
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Footnotes:
1.
The definition of officer will generally follow that of a “Section 16
officer” (officers subject to Section 16 of the Securities and Exchange Act
of 1934) and includes the chief executive, operating, financial, legal,
technology, and accounting officers of a company (including the president,
treasurer, secretary, controller, or any vice president in charge of a principal
business unit, division, or policy function). Current interim officers are
included in this category. For private companies, the equivalent positions are
applicable. A non-employee director
serving as an officer due to statutory requirements (e.g. corporate secretary)
will generally be classified as a Non-Independent Non-Executive Director under “Any material
relationship with the company.” However, if the company provides explicit
disclosure that the director is not receiving additional compensation exceeding
$10,000 per year for serving in that capacity, then the director will be
classified as an Independent Director.
2.
“Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses
50 percent control ownership by the parent company as the standard for
applying its affiliate designation. The manager/advisor of an externally managed
issuer (EMI) is considered an affiliate.
3.
Includes any former CEO of the company prior to the company’s initial public
offering (IPO).
4.
When there is a former CEO of a special purpose acquisition company (SPAC)
serving on the board of an acquired company, ISS will generally classify such
directors as independent unless determined otherwise taking into account the
following factors: the applicable listing standards determination of such
director’s independence; any operating ties to the firm; and the existence of
any other conflicting relationships or related party transactions.
5.
ISS will look at the terms of the interim officer’s employment contract
to determine if it contains severance pay, long-term health and pension
benefits, or other such standard provisions typically contained in contracts of
permanent, non-temporary CEOs. ISS will
also consider if a formal search process was under way for a full-time officer
at the time.
6.
“Immediate family member” follows the SEC’s definition of such and
covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant
or employee) sharing the household of any director, nominee for director,
executive officer, or significant shareholder of the company.
7.
Professional services can be characterized as advisory in nature, generally
involve access to sensitive company information or to strategic decision-making,
and typically have a commission- or fee-based payment structure. Professional
services generally include but are not limited to the following: investment
banking/financial advisory services, commercial banking (beyond deposit
services), investment services, insurance services, accounting/audit services,
consulting services, marketing services, legal services, property management
services, realtor services, lobbying services, executive search services, and IT
consulting services. The following would generally be considered transactional
relationships and not professional services: deposit services, IT tech support
services, educational services, and construction services. The case of
participation in a banking syndicate by a non-lead bank should be considered a
transactional (and hence subject to the associated materiality test) rather than
a professional relationship. “Of Counsel” relationships are only considered
immaterial if the individual does not receive any form of compensation (in
excess of $10,000 per year) from, or is a retired partner of, the firm providing
the professional service. The case of a company providing a professional service
to one of its directors or to an entity with which one of its directors is
affiliated, will be considered a transactional rather than a professional
relationship. Insurance services and marketing services are assumed to be
professional services unless the company explains why such services are not
advisory.
8.
A material transactional relationship, including grants to non-profit organizations, exists if the
company makes annual payments to, or receives annual payments from, another
entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s
gross revenues, for a company that follows NASDAQ listing standards; or the
greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a
company that follows NYSE listing standards. For a company that follows neither
of the preceding standards, ISS will apply the NASDAQ-based materiality test.
(The recipient is the party receiving the financial proceeds from the
transaction).
9.
Dissident directors who are parties to a voting agreement pursuant to a
settlement or similar arrangement may be classified as Independent Directors if
an analysis of the following factors indicates that the voting agreement does
not compromise their alignment with all shareholders’ interests: the terms of
the agreement; the duration of the standstill provision in the agreement; the
limitations and requirements of actions that are agreed upon; if the dissident
director nominee(s) is subject to the standstill; and if there any conflicting
relationships or related party transactions.
10.
Interlocks include: executive officers serving as directors on each
other’s compensation or similar committees (or, in the absence of such a
committee, on the board); or executive officers sitting on each other’s boards
and at least one serves on the other’s compensation or similar committees (or,
in the absence of such a committee, on the board).
11.
The operating involvement of the founder with the company will be considered; if
the founder was never employed by the company, ISS may deem him or her an
Independent Director.
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12.
For purposes of ISS’s director independence classification, “material” will be
defined as a standard of relationship (financial, personal, or otherwise) that a
reasonable person might conclude could potentially influence one’s objectivity
in the boardroom in a manner that would have a meaningful impact on an
individual’s ability to satisfy requisite fiduciary standards on behalf of
shareholders.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors
(except nominees who served only part of the fiscal year3) who attend less than
75 percent of the aggregate of their board and committee meetings for the
period for which they served, unless an acceptable reason for absences is
disclosed in the proxy or another SEC filing. Acceptable reasons for director
absences are generally limited to the following:
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Medical issues/illness; |
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Family emergencies; and |
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Missing only one meeting (when the total of all meetings is
three or fewer). |
In
cases of chronic poor attendance without reasonable justification, in addition
to voting against the director(s) with poor attendance, generally vote against
or withhold from appropriate members of the nominating/governance committees or
the full board.
If
the proxy disclosure is unclear and insufficient to determine whether a director
attended at least 75 percent of the aggregate of his/her board and
committee meetings during his/her period of service, vote against or withhold
from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual
directors who:
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Sit on more than five public company boards; or
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Are CEOs of public companies who sit on the boards of more than
two public companies besides their own—withhold only at their outside
boards4.
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Gender
Diversity: Generally vote against or
withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) at companies where
there are no women on the company’s board. An exception will be made if there
was at least one woman on the board at the preceding annual meeting and the
board makes a firm commitment to return to a gender-diverse status within a
year.
Racial
and/or Ethnic Diversity: For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or
withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) where the board
has no apparent racially or ethnically diverse members5. An exception will be
made if there was racial and/or ethnic diversity on the board at the preceding
annual meeting and the board makes a firm commitment to appoint at least one
racial and/or ethnic diverse member within a year.
3 Nominees who served for
only part of the fiscal year are generally exempted from the attendance policy.
4 Although all of a CEO’s
subsidiary boards with publicly-traded common stock will be counted as separate
boards, ISS will not recommend a withhold vote for the CEO of a parent company
board or any of the controlled (>50 percent ownership) subsidiaries of
that parent but may do so at subsidiaries that are less than 50 percent
controlled and boards outside the parent/subsidiary relationships.
5 Aggregate diversity
statistics provided by the board will only be considered if specific to racial
and/or ethnic diversity.
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Responsiveness
Vote
case-by-case on individual directors,
committee members, or the entire board of directors as appropriate if:
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The board failed to act on a shareholder proposal that received
the support of a majority of the shares cast in the previous year or
failed to act on a management proposal seeking to ratify an existing
charter/bylaw provision that received opposition of a majority of the
shares cast in the previous year. Factors that will be considered are:
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Disclosed outreach efforts by the board to shareholders in the
wake of the vote; |
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Rationale provided in the proxy statement for the level of
implementation; |
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The subject matter of the proposal; |
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The level of support for and opposition to the resolution in
past meetings; |
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Actions taken by the board in response to the majority vote and
its engagement with shareholders; |
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The continuation of the underlying issue as a voting item on
the ballot (as either shareholder or management proposals); and
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Other factors as appropriate. |
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The board failed to act on takeover offers where the majority
of shares are tendered; |
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At the previous board election, any director received more than
50 percent withhold/against votes of the shares cast and the company
has failed to address the issue(s) that caused the high withhold/against
vote. |
Vote
case-by-case on Compensation Committee
members (or, in exceptional cases, the full board) and the Say on Pay proposal
if:
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◾ |
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The company’s previous say-on-pay received the support
of less than 70 percent of votes cast. Factors that will be
considered are: |
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The company’s response, including: |
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Disclosure of engagement efforts with major institutional
investors, including the frequency and timing of engagements and the
company participants (including whether independent directors
participated); |
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Disclosure of the specific concerns voiced by dissenting
shareholders that led to the say-on-pay opposition;
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Disclosure of specific and meaningful actions taken to address
shareholders’ concerns; |
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Other recent compensation actions taken by the company;
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Whether the issues raised are recurring or isolated;
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The company’s ownership structure; and |
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Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
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The board implements an advisory vote on executive compensation
on a less frequent basis than the frequency that received the plurality of
votes cast. |
Accountability
PROBLEMATIC TAKEOVER
DEFENSES, CAPITAL STRUCTURE,
AND GOVERNANCE STRUCTURE
Poison
Pills: Generally vote against or
withhold from all nominees (except new nominees1, who should be
considered case-by-case) if:
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The company has a poison pill with a deadhand or slowhand
feature6;
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6 If a short-term pill with a deadhand
or slowhand feature is enacted but expires before the next shareholder vote, ISS
will generally still recommend withhold/against nominees at the next shareholder
meeting following its adoption.
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The board makes a material adverse modification to an existing
pill, including, but not limited to, extension, renewal, or lowering the
trigger, without shareholder approval; or |
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The company has a long-term poison pill (with a term of over
one year) that was not approved by the public shareholders7.
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Vote
case-by-case on nominees if the board
adopts an initial short-term pill6 (with a term of one year
or less) without shareholder approval, taking into consideration:
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◾ |
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The disclosed rationale for the adoption;
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The company’s market capitalization (including absolute level
and sudden changes); |
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A commitment to put any renewal to a shareholder vote; and
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Other factors as relevant. |
Unequal
Voting Rights: Generally vote
withhold or against directors individually, committee members, or the entire
board (except new nominees1, who should be
considered case-by-case), if the company employs
a common stock structure with unequal voting rights8.
Exceptions
to this policy will generally be limited to:
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Newly-public companies9 with a sunset
provision of no more than seven years from the date of going public;
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Limited Partnerships and the Operating Partnership (OP) unit
structure of REITs; |
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Situations where the super-voting shares represent less than 5%
of total voting power and therefore considered to be de minimis; or
|
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The company provides sufficient protections for minority
shareholders, such as allowing minority shareholders a regular binding
vote on whether the capital structure should be maintained.
|
Classified Board Structure: The board is classified, and a continuing director
responsible for a problematic governance issue at the board/committee level that
would warrant a withhold/against vote recommendation is not up for election. All
appropriate nominees (except new) may be held accountable.
Removal
of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of,
state laws requiring a classified board structure.
Problematic Governance Structure: For companies that hold or held their first annual
meeting9 of public
shareholders after Feb. 1, 2015, generally vote against or withhold from
directors individually, committee members, or the entire board (except new
nominees1, who
should be considered case-by-case) if, prior to or in
connection with the company’s public offering, the company or its board adopted
the following bylaw or charter provisions that are considered to be materially
adverse to shareholder rights:
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Supermajority vote requirements to amend the bylaws or charter;
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A classified board structure; or |
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Other egregious provisions. |
7 Approval prior to, or in
connection, with a company’s becoming publicly-traded, or in connection with a
de-SPAC transaction, is insufficient.
8 This generally includes
classes of common stock that have additional votes per share than other shares;
classes of shares that are not entitled to vote on all the same ballot items or
nominees; or stock with time-phased voting rights (“loyalty shares”).
9 Includes companies that
emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those
who complete a traditional initial public offering.
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A
provision which specifies that the problematic structure(s) will be sunset
within seven years of the date of going public will be considered a mitigating
factor.
Unless
the adverse provision is reversed or removed, vote case-by-case on director nominees in
subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors
individually, committee members, or the entire board (except new nominees1, who should be
considered case-by-case) if the board amends the
company’s bylaws or charter without shareholder approval in a manner that
materially diminishes shareholders’ rights or that could adversely impact
shareholders, considering the following factors:
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The board’s rationale for adopting the bylaw/charter amendment
without shareholder ratification; |
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Disclosure by the company of any significant engagement with
shareholders regarding the amendment; |
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|
The level of impairment of shareholders’ rights caused by the
board’s unilateral amendment to the bylaws/charter;
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The board’s track record with regard to unilateral board action
on bylaw/charter amendments or other entrenchment provisions;
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The company’s ownership structure; |
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The company’s existing governance provisions;
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The timing of the board’s amendment to the bylaws/charter in
connection with a significant business development; and
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Other factors, as deemed appropriate, that may be relevant to
determine the impact of the amendment on shareholders.
|
Unless
the adverse amendment is reversed or submitted to a binding shareholder vote, in
subsequent years vote case-by-case on director nominees.
Generally vote against (except new nominees1, who should be
considered case-by-case) if the directors:
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Adopted supermajority vote requirements to amend the bylaws or
charter; |
| |
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Eliminated shareholders’ ability to amend bylaws;
|
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Adopted a fee-shifting provision; or
|
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Adopted another provision deemed egregious.
|
Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members
of the governance committee if:
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The company’s governing documents impose undue restrictions on
shareholders’ ability to amend the bylaws. Such restrictions include but
are not limited to: outright prohibition on the submission of binding
shareholder proposals or share ownership requirements, subject matter
restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an
ongoing basis. |
Submission
of management proposals to approve or ratify requirements in excess of SEC Rule
14a-8 for the submission of binding
bylaw amendments will generally be viewed as an insufficient restoration of
shareholders’ rights. Generally continue to vote against or withhold on an
ongoing basis until shareholders are provided with an unfettered ability to
amend the bylaws or a proposal providing for such unfettered right is submitted
for shareholder approval.
Director
Performance Evaluation: The board
lacks mechanisms to promote accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is measured by
one-, three-, and five-year total
shareholder returns in the bottom half of a company’s four-digit GICS industry
group
(Russell
3000 companies only). Take into consideration the company’s operational metrics
and other factors as warranted. Problematic provisions include but are not
limited to:
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A classified board structure; |
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C-16 |
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16 of 81 |
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A supermajority vote requirement; |
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Either a plurality vote standard in uncontested director
elections, or a majority vote standard in contested elections;
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The inability of shareholders to call special meetings;
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The inability of shareholders to act by written consent;
|
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A multi-class capital structure; and/or
|
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A non-shareholder-approved poison pill.
|
Management Proposals to Ratify Existing Charter or Bylaw
Provisions: Vote against/withhold
from individual directors, members of the governance committee, or the full
board, where boards ask shareholders to ratify existing charter or bylaw
provisions considering the following factors:
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The presence of a shareholder proposal addressing the same
issue on the same ballot; |
| |
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|
The board’s rationale for seeking ratification;
|
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|
Disclosure of actions to be taken by the board should the
ratification proposal fail; |
| |
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|
Disclosure of shareholder engagement regarding the board’s
ratification request; |
| |
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|
The level of impairment to shareholders’ rights caused by the
existing provision; |
| |
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|
The history of management and shareholder proposals on the
provision at the company’s past meetings; |
| |
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|
Whether the current provision was adopted in response to the
shareholder proposal; |
| |
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The company’s ownership structure; and |
| |
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Previous use of ratification proposals to exclude shareholder
proposals. |
Problematic Audit-Related Practices
Generally
vote against or withhold from the members of the Audit Committee if:
| |
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The non-audit fees
paid to the auditor are excessive;
|
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The company receives an adverse opinion on the company’s
financial statements from its auditor; or |
| |
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|
There is persuasive evidence that the Audit Committee entered
into an inappropriate indemnification agreement with its auditor that
limits the ability of the company, or its shareholders, to pursue
legitimate legal recourse against the audit firm. |
Vote
case-by-case on members of the Audit
Committee and potentially the full board if:
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|
Poor accounting practices are identified that rise to a level
of serious concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures. Examine the
severity, breadth, chronological sequence, and duration, as well as the
company’s efforts at remediation or corrective actions, in determining
whether withhold/against votes are warranted. |
Problematic Compensation Practices
In
the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot
item or in egregious situations, vote against or withhold from the members of
the Compensation Committee and potentially the full board if:
| |
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|
There is an unmitigated misalignment between CEO pay and
company performance (pay for
performance); |
| |
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|
The company maintains significant problematic pay practices; or
|
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The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Generally
vote against or withhold from the Compensation Committee chair, other committee
members, or potentially the full board if:
| |
◾ |
|
The company fails to include a Say on Pay ballot item when
required under SEC provisions, or under the company’s declared frequency
of say on pay; or |
| |
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|
The company fails to include a Frequency of Say on Pay ballot
item when required under SEC provisions. |
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C-17 |
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17 of 81 |
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Generally
vote against members of the board committee responsible for approving/setting
non-employee director compensation if
there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without
disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock: Vote against the members of the committee that
oversees risks related to pledging, or the full board, where a significant level
of pledged company stock by executives or directors raises concerns. The
following factors will be considered:
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The presence of an anti-pledging policy, disclosed in the proxy
statement, that prohibits future pledging activity;
|
| |
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|
The magnitude of aggregate pledged shares in terms of total
common shares outstanding, market value, and trading volume;
|
| |
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|
Disclosure of progress or lack thereof in reducing the
magnitude of aggregate pledged shares over time; |
| |
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|
Disclosure in the proxy statement that shares subject to stock
ownership and holding requirements do not include pledged company stock;
and |
| |
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Any other relevant factors. |
Climate Accountability
For
companies that are significant greenhouse gas (GHG) emitters, through their
operations or value chain10, generally vote against
or withhold from the incumbent chair of the responsible committee (or other
directors on a case-by-case basis) in cases where ISS
determines that the company is not taking the minimum steps needed to
understand, assess, and mitigate risks related to climate change to the company
and the larger economy.
Minimum
steps to understand and mitigate those risks are considered to be the following.
Both minimum criteria will be required to be in alignment with the policy :
| |
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Detailed disclosure of climate-related risks, such as according
to the framework established by the Task Force on Climate-related
Financial Disclosures (TCFD), including: |
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Board governance measures; |
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Risk management analyses; and |
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Appropriate GHG emissions reduction targets.
|
At
this time, “appropriate GHG emissions reductions targets” will be medium-term
GHG reduction targets or Net Zero-by-2050 GHG reduction targets for
a company’s operations (Scope 1) and electricity use (Scope 2). Targets should
cover the vast majority of the company’s direct emissions.
Governance Failures
Under
extraordinary circumstances, vote against or withhold from directors
individually, committee members, or the entire board, due to:
| |
◾ |
|
Material failures of governance, stewardship, risk
oversight11,
or fiduciary responsibilities at the company; |
| |
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Failure to replace management as appropriate; or
|
10 Companies defined as
“significant GHG emitters” will be those on the current Climate Action 100+
Focus Group list.
11 Examples of failure of risk oversight
include but are not limited to: bribery; large or serial fines or sanctions from
regulatory bodies; demonstrably poor risk oversight of environmental and social
issues, including climate change; significant adverse legal judgments or
settlement; or hedging of company stock.
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C-18 |
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Egregious actions related to a director’s service on other
boards that raise substantial doubt about his or her ability to
effectively oversee management and serve the best interests of
shareholders at any company. |
Voting on Director Nominees in Contested
Elections
Vote-No Campaigns
General
Recommendation: In cases where
companies are targeted in connection with public “vote-no” campaigns, evaluate director
nominees under the existing governance policies for voting on director nominees
in uncontested elections. Take into consideration the arguments submitted by
shareholders and other publicly available information.
Proxy Contests/Proxy Access
General
Recommendation: Vote case-by-case on the election of
directors in contested elections, considering the following factors:
| |
◾ |
|
Long-term financial performance of the company relative to its
industry; |
| |
◾ |
|
Management’s track record; |
| |
◾ |
|
Background to the contested election; |
| |
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|
Nominee qualifications and any compensatory arrangements;
|
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◾ |
|
Strategic plan of dissident slate and quality of the critique
against management; |
| |
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|
Likelihood that the proposed goals and objectives can be
achieved (both slates); and |
| |
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Stock ownership positions. |
In
the case of candidates nominated pursuant to proxy access, vote case-by-case considering any
applicable factors listed above or additional factors which may be relevant,
including those that are specific to the company, to the nominee(s) and/or to
the nature of the election (such as whether there are more candidates than board
seats).
Other Board-Related Proposals
Adopt
Anti-Hedging/Pledging/Speculative Investments Policy
General
Recommendation: Generally vote for
proposals seeking a policy that prohibits named executive officers from engaging
in derivative or speculative transactions involving company stock, including
hedging, holding stock in a margin account, or pledging stock as collateral for
a loan. However, the company’s existing policies regarding responsible use of
company stock will be considered.
Board Refreshment
Board
refreshment is best implemented through an ongoing program of individual
director evaluations, conducted annually, to ensure the evolving needs of the
board are met and to bring in fresh perspectives, skills, and diversity as
needed.
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C-19 |
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Term/Tenure Limits
General
Recommendation: Vote case-by-case on management proposals
regarding director term/tenure limits, considering:
| |
◾ |
|
The rationale provided for adoption of the term/tenure limit;
|
| |
◾ |
|
The robustness of the company’s board evaluation process;
|
| |
◾ |
|
Whether the limit is of sufficient length to allow for a broad
range of director tenures; |
| |
◾ |
|
Whether the limit would disadvantage independent directors
compared to non-independent
directors; and |
| |
◾ |
|
Whether the board will impose the limit evenly, and not have
the ability to waive it in a discriminatory manner.
|
Vote
case-by-case on shareholder proposals
asking for the company to adopt director term/tenure limits, considering:
| |
◾ |
|
The scope of the shareholder proposal; and
|
| |
◾ |
|
Evidence of problematic issues at the company combined with, or
exacerbated by, a lack of board refreshment. |
Age Limits
General
Recommendation: Generally vote
against management and shareholder proposals to limit the tenure of independent
directors through mandatory retirement ages. Vote for proposals to remove
mandatory age limits.
Board Size
General
Recommendation: Vote for proposals
seeking to fix the board size or designate a range for the board size.
Vote
against proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
Classification/Declassification of the
Board
General
Recommendation: Vote against
proposals to classify (stagger) the board.
Vote
for proposals to repeal classified boards and to elect all directors annually.
CEO Succession Planning
General
Recommendation: Generally vote for
proposals seeking disclosure on a CEO succession planning policy, considering,
at a minimum, the following factors:
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◾ |
|
The reasonableness/scope of the request; and
|
| |
◾ |
|
The company’s existing disclosure on its current CEO succession
planning process. |
Cumulative Voting
General
Recommendation: Generally vote
against management proposals to eliminate cumulate voting, and for shareholder
proposals to restore or provide for cumulative voting, unless:
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C-20 |
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The company has proxy access12, thereby allowing
shareholders to nominate directors to the company’s ballot; and
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The company has adopted a majority vote standard, with a carve-out for plurality voting in
situations where there are more nominees than seats, and a director
resignation policy to address failed elections. |
Vote
for proposals for cumulative voting at controlled companies (insider voting
power > 50%).
Director and Officer Indemnification,
Liability Protection, and Exculpation
General
Recommendation: Vote case-by-case on proposals on director
and officer indemnification, liability protection, and exculpation13.
Consider
the stated rationale for the proposed change. Also consider, among other
factors, the extent to which the proposal would:
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary
damages for violating the duty of care. |
| |
◾ |
|
Eliminate directors’ and officers’ liability for monetary
damages for violating the duty of loyalty. |
| |
◾ |
|
Expand coverage beyond just legal expenses to liability for
acts that are more serious violations of fiduciary obligation than mere
carelessness. |
| |
◾ |
|
Expand the scope of indemnification to provide for mandatory
indemnification of company officials in connection with acts that
previously the company was permitted to provide indemnification for, at
the discretion of the company’s board (i.e., “permissive
indemnification”), but that previously the company was not required to
indemnify. |
Vote
for those proposals providing such expanded coverage in cases when a director’s
or officer’s legal defense was unsuccessful if both of the following apply:
| |
◾ |
|
If the individual was found to have acted in good faith and in
a manner that the individual reasonably believed was in the best interests
of the company; and |
If
only the individual’s legal expenses would be covered.
Establish/Amend Nominee Qualifications
General
Recommendation: Vote case-by-case on proposals that
establish or amend director qualifications. Votes should be based on the
reasonableness of the criteria and the degree to which they may preclude
dissident nominees from joining the board.
Vote
case-by-case on shareholder
resolutions seeking a director nominee who possesses a particular subject matter
expertise, considering:
| |
◾ |
|
The company’s board committee structure, existing subject
matter expertise, and board nomination provisions relative to that of its
peers; |
12 A proxy access right that meets the
recommended guidelines.
13 Indemnification: the condition
of being secured against loss or damage.
Limited
liability: a person’s financial liability is limited to a fixed sum, or
personal financial assets are not at risk if the individual loses a lawsuit that
results in financial award/damages to the plaintiff.
Exculpation:
to eliminate or limit the personal liability of a director or officer to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director or officer.
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C-21 |
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The company’s existing board and management oversight
mechanisms regarding the issue for which board oversight is sought;
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The company’s disclosure and performance relating to the issue
for which board oversight is sought and any significant related
controversies; and |
| |
◾ |
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The scope and structure of the proposal.
|
Establish Other Board Committee
Proposals
General
Recommendation: Generally vote
against shareholder proposals to establish a new board committee, as such
proposals seek a specific oversight mechanism/structure that potentially limits
a company’s flexibility to determine an appropriate oversight mechanism for
itself. However, the following factors will be considered:
| |
◾ |
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Existing oversight mechanisms (including current committee
structure) regarding the issue for which board oversight is sought;
|
| |
◾ |
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Level of disclosure regarding the issue for which board
oversight is sought; |
| |
◾ |
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Company performance related to the issue for which board
oversight is sought; |
| |
◾ |
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Board committee structure compared to that of other companies
in its industry sector; and |
| |
◾ |
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The scope and structure of the proposal.
|
Filling Vacancies/Removal of Directors
General
Recommendation: Vote against
proposals that provide that directors may be removed only for cause.
Vote
for proposals to restore shareholders’ ability to remove directors with or
without cause.
Vote
against proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote
for proposals that permit shareholders to elect directors to fill board
vacancies.
Independent Board Chair
General
Recommendation: Generally vote for
shareholder proposals requiring that the board chair position be filled by an
independent director, taking into consideration the following:
| |
◾ |
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The scope and rationale of the proposal;
|
| |
◾ |
|
The company’s current board leadership structure;
|
| |
◾ |
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The company’s governance structure and practices;
|
| |
◾ |
|
Company performance; and |
| |
◾ |
|
Any other relevant factors that may be applicable.
|
The
following factors will increase the likelihood of a “for” recommendation:
| |
◾ |
|
A majority non-independent board and/or the
presence of non-independent
directors on key board committees; |
| |
◾ |
|
A weak or poorly-defined lead independent director role that
fails to serve as an appropriate counterbalance to a combined CEO/chair
role; |
| |
◾ |
|
The presence of an executive or non-independent chair in addition to
the CEO, a recent recombination of the role of CEO and chair, and/or
departure from a structure with an independent chair;
|
| |
◾ |
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Evidence that the board has failed to oversee and address
material risks facing the company; |
| |
◾ |
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A material governance failure, particularly if the board has
failed to adequately respond to shareholder concerns or if the board has
materially diminished shareholder rights; or |
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C-22 |
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Evidence that the board has failed to intervene when
management’s interests are contrary to shareholders’ interests.
|
Majority of Independent
Directors/Establishment of Independent Committees
General
Recommendation: Vote for shareholder
proposals asking that a majority or more of directors be independent unless the
board composition already meets the proposed threshold by ISS’ definition of
Independent Director (See ISS’ Classification
of Directors.)
Vote
for shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors unless
they currently meet that standard.
Majority Vote Standard for the
Election of Directors
General Recommendation: Generally vote for management proposals to adopt a
majority of votes cast standard for directors in uncontested elections. Vote
against if no carve-out for a plurality
vote standard in contested elections is included.
Generally
vote for precatory and binding shareholder 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
are strongly encouraged to 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.
Proxy Access
General
Recommendation: Generally vote for
management and shareholder proposals for proxy access with the following
provisions:
| |
◾ |
|
Ownership threshold: maximum requirement not more than
three percent (3%) of the voting power; |
| |
◾ |
|
Ownership duration: maximum requirement not longer than
three (3) years of continuous ownership for each member of the
nominating group; |
| |
◾ |
|
Aggregation: minimal or no limits on the number of
shareholders permitted to form a nominating group;
|
| |
◾ |
|
Cap: cap on nominees of generally twenty-five percent
(25%) of the board. |
Review
for reasonableness any other restrictions on the right of proxy access.
Generally vote against proposals that are more restrictive than these
guidelines.
Require More Nominees than Open Seats
General
Recommendation: Vote against
shareholder proposals that would require a company to nominate more candidates
than the number of open board seats.
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C-23 |
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23 of 81 |
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Shareholder Engagement Policy
(Shareholder Advisory Committee)
General
Recommendation: Generally vote for
shareholder proposals requesting that the board establish an internal
mechanism/process, which may include a committee, in order to improve
communications between directors and shareholders, unless the company has the
following features, as appropriate:
| |
◾ |
|
Established a communication structure that goes beyond the
exchange requirements to facilitate the exchange of information between
shareholders and members of the board; |
| |
◾ |
|
Effectively disclosed information with respect to this
structure to its shareholders; |
| |
◾ |
|
Company has not ignored majority-supported shareholder
proposals, or a majority withhold vote on a director nominee; and
|
| |
◾ |
|
The company has an independent chair or a lead director,
according to ISS’ definition. This
individual must be made available for periodic consultation and direct
communication with major shareholders. |
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C-24 |
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24 of 81 |
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2. Audit-Related
Auditor Indemnification and Limitation
of Liability
General
Recommendation: Vote case-by-case on the issue of auditor
indemnification and limitation of liability. Factors to be assessed include, but
are not limited to:
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The terms of the auditor agreement—the degree to which these
agreements impact shareholders’ rights; |
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The motivation and rationale for establishing the agreements;
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The quality of the company’s disclosure; and
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The company’s historical practices in the audit area.
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Vote
against or withhold from members of an audit committee in situations where there
is persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.
Auditor Ratification
General
Recommendation: Vote for proposals
to ratify auditors unless any of the following apply:
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An auditor has a financial interest in or association with the
company, and is therefore not independent; |
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There is reason to believe that the independent auditor has
rendered an opinion that is neither accurate nor indicative of the
company’s financial position; |
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Poor accounting practices are identified that rise to a serious
level of concern, such as fraud or misapplication of GAAP; or
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Fees for non-audit
services (“Other” fees) are excessive. |
Non-audit fees are excessive if:
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Non-audit (“other”)
fees > audit fees + audit-related fees + tax compliance/preparation
fees |
Tax
compliance and preparation include the preparation of original and amended tax
returns and refund claims, and tax payment planning. All other services in the
tax category, such as tax advice, planning, or consulting, should be added to
“Other” fees. If the breakout of tax fees cannot be determined, add all tax fees
to “Other” fees.
In
circumstances where “Other” fees include fees related to significant one-time capital structure events (such as
initial public offerings, bankruptcy emergence, and spin-offs) and the company
makes public disclosure of the amount and nature of those fees that are an
exception to the standard “non-audit
fee” category, then such fees may be excluded from the non-audit fees considered in determining the
ratio of non-audit to
audit/audit-related fees/tax compliance and preparation for purposes of
determining whether non-audit fees are
excessive.
Shareholder Proposals Limiting Non-Audit Services
General
Recommendation: Vote case-by-case on shareholder proposals
asking companies to prohibit or limit their auditors from engaging in non-audit services.
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C-25 |
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Shareholder Proposals on Audit Firm
Rotation
General
Recommendation: Vote case-by-case on shareholder proposals
asking for audit firm rotation, taking into account:
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The tenure of the audit firm; |
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The length of rotation specified in the proposal;
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Any significant audit-related issues at the company;
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The number of Audit Committee meetings held each year;
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The number of financial experts serving on the committee; and
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Whether the company has a periodic renewal process where the
auditor is evaluated for both audit quality and competitive price.
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C-26 |
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3. Shareholder Rights &
Defenses
Advance Notice Requirements for
Shareholder Proposals/Nominations
General
Recommendation: Vote case-by-case on advance notice
proposals, giving support to those proposals which allow shareholders to submit
proposals/nominations as close to the meeting date as reasonably possible and
within the broadest window possible, recognizing the need to allow sufficient
notice for company, regulatory, and shareholder review.
To
be reasonable, the company’s deadline for shareholder notice of a
proposal/nominations must be no earlier than 120 days prior to the anniversary
of the previous year’s meeting and have a submittal window of no shorter than 30
days from the beginning of the notice period (also known as a 90-120-day window). The submittal
window is the period under which shareholders must file their
proposals/nominations prior to the deadline.
In
general, support additional efforts by companies to ensure full disclosure in
regard to a proponent’s economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder
Consent
General
Recommendation: Vote against
proposals giving the board exclusive authority to amend the bylaws.
Vote
case-by-case on proposals giving the
board the ability to amend the bylaws in addition to shareholders, taking into
account the following:
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Any impediments to shareholders’ ability to amend the bylaws
(i.e. supermajority voting requirements); |
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The company’s ownership structure and historical voting
turnout; |
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Whether the board could amend bylaws adopted by shareholders;
and |
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Whether shareholders would retain the ability to ratify any
board-initiated amendments. |
Control Share Acquisition Provisions
General
Recommendation: Vote for proposals
to opt out of control share acquisition statutes unless doing so would enable
the completion of a takeover that would be detrimental to shareholders.
Vote
against proposals to amend the charter to include control share acquisition
provisions.
Vote
for proposals to restore voting rights to the control shares.
Control
share acquisition statutes function by denying shares their voting rights when
they contribute to ownership in excess of certain thresholds. Voting rights for
those shares exceeding ownership limits may only be restored by approval of
either a majority or supermajority of disinterested shares. Thus, control share
acquisition statutes effectively require a hostile bidder to put its offer to a
shareholder vote or risk voting disenfranchisement if the bidder continues
buying up a large block of shares.
Control Share Cash-Out Provisions
General
Recommendation: Vote for proposals
to opt out of control share cash-out
statutes.
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C-27 |
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Control
share cash-out statutes give dissident
shareholders the right to “cash-out” of
their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a preset threshold
level, remaining shareholders are given the right to sell their shares to the
acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General
Recommendation: Vote for proposals
to opt out of state disgorgement provisions.
Disgorgement
provisions require an acquirer or potential acquirer of more than a certain
percentage of a company’s stock to disgorge, or pay back, to the company any
profits realized from the sale of that company’s stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General
Recommendation: Vote case-by-case on proposals to adopt
fair price provisions (provisions that stipulate that an acquirer must pay the
same price to acquire all shares as it paid to acquire the control shares),
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price.
Generally
vote against fair price provisions with shareholder vote requirements greater
than a majority of disinterested shares.
Freeze-Out Provisions
General
Recommendation: Vote for proposals
to opt out of state freeze-out
provisions. Freeze-out provisions force
an investor who surpasses a certain ownership threshold in a company to wait a
specified period of time before gaining control of the company.
Greenmail
General
Recommendation: Vote for proposals
to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a
company’s ability to make greenmail payments.
Vote
case-by-case on anti-greenmail
proposals when they are bundled with other charter or bylaw amendments.
Greenmail
payments are targeted share repurchases by management of company stock from
individuals or groups seeking control of the company. Since only the hostile
party receives payment, usually at a substantial premium over the market value
of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal
forum selection provisions require that U.S. federal courts be the sole forum
for shareholders to litigate claims arising under federal securities law.
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C-28 |
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General
Recommendation: Generally vote for
federal forum selection provisions in the charter or bylaws that specify “the
district courts of the United States” as the exclusive forum for federal
securities law matters, in the absence of serious concerns about corporate
governance or board responsiveness to shareholders.
Vote
against provisions that restrict the forum to a particular federal district
court; unilateral adoption (without a shareholder vote) of such a provision will
generally be considered a one-time
failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State
Law Matters
Exclusive
forum provisions in the charter or bylaws restrict shareholders’ ability to
bring derivative lawsuits against the company, for claims arising out of state
corporate law, to the courts of a particular state (generally the state of
incorporation).
General
Recommendation: Generally vote for
charter or bylaw provisions that specify courts located within the state of
Delaware as the exclusive forum for corporate law matters for Delaware
corporations, in the absence of serious concerns about corporate governance or
board responsiveness to shareholders.
For
states other than Delaware, vote case-by-case on exclusive forum
provisions, taking into consideration:
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The company’s stated rationale for adopting such a provision;
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Disclosure of past harm from duplicative shareholder lawsuits
in more than one forum; |
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The breadth of application of the charter or bylaw provision,
including the types of lawsuits to which it would apply and the definition
of key terms; and |
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Governance features such as shareholders’ ability to repeal the
provision at a later date (including the vote standard applied when
shareholders attempt to amend the charter or bylaws) and their ability to
hold directors accountable through annual director elections and a
majority vote standard in uncontested elections. |
Generally
vote against provisions that specify a state other than the state of
incorporation as the exclusive forum for corporate law matters, or that specify
a particular local court within the state; unilateral adoption of such a
provision will generally be considered a one-time failure under the Unilateral
Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or
bylaws require that a shareholder who sues a company unsuccessfully pay all
litigation expenses of the defendant corporation and its directors and officers.
General
Recommendation: Generally vote
against provisions that mandate fee-shifting whenever plaintiffs are not
completely successful on the merits (i.e., including cases where the plaintiffs
are partially successful).
Unilateral
adoption of a fee-shifting provision
will generally be considered an ongoing failure under the Unilateral Bylaw/Charter
Amendments policy.
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C-29 |
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Net Operating Loss (NOL) Protective
Amendments
General
Recommendation: Vote against
proposals to adopt a protective amendment for the stated purpose of protecting a
company’s net operating losses (NOL) if the effective term of the protective
amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote
case-by-case, considering the
following factors, for management proposals to adopt an NOL protective amendment
that would remain in effect for the shorter of three years (or less) and the
exhaustion of the NOL:
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The ownership threshold (NOL protective amendments generally
prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock
ownership percentage of an existing 5-percent holder);
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Shareholder protection mechanisms (sunset provision or
commitment to cause expiration of the protective amendment upon exhaustion
or expiration of the NOL); |
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The company’s existing governance structure including: board
independence, existing takeover defenses, track record of responsiveness
to shareholders, and any other problematic governance concerns; and
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Any other factors that may be applicable.
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Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a
Vote and/or Adopt a Pill Policy
General
Recommendation: Vote for shareholder
proposals requesting that the company submit its poison pill to a shareholder
vote or redeem it unless the company has: (1) A shareholder-approved poison
pill in place; or (2) The company has adopted a policy concerning the
adoption of a pill in the future specifying that the board will only adopt a
shareholder rights plan if either:
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Shareholders have approved the adoption of the plan; or
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The board, in its exercise of its fiduciary responsibilities,
determines that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay in adoption that would
result from seeking stockholder approval (i.e., the “fiduciary out”
provision). A poison pill adopted under this fiduciary out will be put to
a shareholder ratification vote within 12 months of adoption or expire. If
the pill is not approved by a majority of the votes cast on this issue,
the plan will immediately terminate. |
If
the shareholder proposal calls for a time period of less than 12 months for
shareholder ratification after adoption, vote for the proposal, but add the
caveat that a vote within 12 months would be considered sufficient
implementation.
Management Proposals to Ratify a
Poison Pill
General
Recommendation: Vote case-by-case on management proposals
on poison pill ratification, focusing on the features of the shareholder rights
plan. Rights plans should contain the following attributes:
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No lower than a 20 percent trigger, flip-in or flip-over;
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A term of no more than three years; |
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No deadhand, slowhand, no-hand, or similar feature that limits
the ability of a future board to redeem the pill; |
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Shareholder redemption feature (qualifying offer clause); if
the board refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or
seek a written consent to vote on rescinding the pill.
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C-30 |
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In
addition, the rationale for adopting the pill should be thoroughly explained by
the company. In examining the request for the pill, take into consideration the
company’s existing governance structure, including: board independence, existing
takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill
to Preserve Net Operating Losses (NOLs)
General
Recommendation: Vote against
proposals to adopt a poison pill for the stated purpose of protecting a
company’s net operating losses (NOL) if the term of the pill would exceed the
shorter of three years and the exhaustion of the NOL.
Vote
case-by-case on management proposals
for poison pill ratification, considering the following factors, if the term of
the pill would be the shorter of three years (or less) and the exhaustion of the
NOL:
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The ownership threshold to transfer (NOL pills generally have a
trigger slightly below 5 percent); |
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Shareholder protection mechanisms (sunset provision, or
commitment to cause expiration of the pill upon exhaustion or expiration
of NOLs); |
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The company’s existing governance structure, including: board
independence, existing takeover defenses, track record of responsiveness
to shareholders, and any other problematic governance concerns; and
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Any other factors that may be applicable.
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Proxy Voting Disclosure,
Confidentiality, and Tabulation
General
Recommendation: Vote case-by-case on proposals regarding
proxy voting mechanics, taking into consideration whether implementation of the
proposal is likely to enhance or protect shareholder rights. Specific issues
covered under the policy include, but are not limited to, confidential voting of
individual proxies and ballots, confidentiality of running vote tallies, and the
treatment of abstentions and/or broker non-votes in the company’s vote-counting
methodology.
While
a variety of factors may be considered in each analysis, the guiding principles
are: transparency, consistency, and fairness in the proxy voting process. The
factors considered, as applicable to the proposal, may include:
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The scope and structure of the proposal;
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The company’s stated confidential voting policy (or other
relevant policies) and whether it ensures a “level playing field” by
providing shareholder proponents with equal access to vote information
prior to the annual meeting; |
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The company’s vote standard for management and shareholder
proposals and whether it ensures consistency and fairness in the proxy
voting process and maintains the integrity of vote results;
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Whether the company’s disclosure regarding its vote counting
method and other relevant voting policies with respect to management and
shareholder proposals are consistent and clear; |
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Any recent controversies or concerns related to the company’s
proxy voting mechanics; |
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Any unintended consequences resulting from implementation of
the proposal; and |
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Any other factors that may be relevant.
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Ratification Proposals: Management
Proposals to Ratify Existing Charter or Bylaw Provisions
General
Recommendation: Generally vote
against management proposals to ratify provisions of the company’s existing
charter or bylaws, unless these governance provisions align with best practice.
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C-31 |
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31 of 81 |
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In
addition, voting against/withhold from individual directors, members of the
governance committee, or the full board may be warranted, considering:
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The presence of a shareholder proposal addressing the same
issue on the same ballot; |
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The board’s rationale for seeking ratification;
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Disclosure of actions to be taken by the board should the
ratification proposal fail; |
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Disclosure of shareholder engagement regarding the board’s
ratification request; |
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The level of impairment to shareholders’ rights caused by the
existing provision; |
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The history of management and shareholder proposals on the
provision at the company’s past meetings; |
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Whether the current provision was adopted in response to the
shareholder proposal; |
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The company’s ownership structure; and |
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Previous use of ratification proposals to exclude shareholder
proposals. |
Reimbursing Proxy Solicitation
Expenses
General
Recommendation: Vote case-by-case on proposals to reimburse
proxy solicitation expenses.
When
voting in conjunction with support of a dissident slate, vote for the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally
vote for shareholder proposals calling for the reimbursement of reasonable costs
incurred in connection with nominating one or more candidates in a contested
election where the following apply:
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The election of fewer than 50 percent of the directors to
be elected is contested in the election; |
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One or more of the dissident’s candidates is elected;
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Shareholders are not permitted to cumulate their votes for
directors; and |
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The election occurred, and the expenses were incurred, after
the adoption of this bylaw. |
Reincorporation Proposals
General
Recommendation: Management or
shareholder proposals to change a company’s state of incorporation should be
evaluated case-by-case, giving consideration to
both financial and corporate governance concerns including the following:
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Reasons for reincorporation; |
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Comparison of company’s governance practices and provisions
prior to and following the reincorporation; and |
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Comparison of corporation laws of original state and
destination state. |
Vote
for reincorporation when the economic factors outweigh any neutral or negative
governance changes.
Shareholder Ability to Act by Written
Consent
General
Recommendation: Generally vote
against management and shareholder proposals to restrict or prohibit
shareholders’ ability to act by written consent.
Generally
vote for management and shareholder proposals that provide shareholders with the
ability to act by written consent, taking into account the following factors:
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Shareholders’ current right to act by written consent;
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The inclusion of exclusionary or prohibitive language;
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C-32 |
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Investor ownership structure; and
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Shareholder support of, and management’s response to, previous
shareholder proposals. |
Vote
case-by-case on shareholder proposals
if, in addition to the considerations above, the company has the following
governance and antitakeover provisions:
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An unfettered14 right for
shareholders to call special meetings at a 10 percent threshold;
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A majority vote standard in uncontested director elections;
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No non-shareholder-approved pill; and
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An annually elected board. |
Shareholder Ability to Call Special
Meetings
General
Recommendation: Vote against
management or shareholder proposals to restrict or prohibit shareholders’
ability to call special meetings.
Generally
vote for management or shareholder proposals that provide shareholders with the
ability to call special meetings taking into account the following factors:
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Shareholders’ current right to call special meetings;
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Minimum ownership threshold necessary to call special meetings
(10 percent preferred); |
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The inclusion of exclusionary or prohibitive language;
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Investor ownership structure; and |
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Shareholder support of, and management’s response to, previous
shareholder proposals. |
Stakeholder Provisions
General
Recommendation: Vote against
proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a
merger or business combination.
State Antitakeover Statutes
General
Recommendation: Vote case-by-case on proposals to opt in or
out of state takeover statutes (including fair price provisions, stakeholder
laws, poison pill endorsements, severance pay and labor contract provisions, and
anti-greenmail provisions).
Supermajority Vote Requirements
General
Recommendation: Vote against
proposals to require a supermajority shareholder vote.
Vote
for management or shareholder proposals to reduce supermajority vote
requirements. However, for companies with shareholder(s) who have significant
ownership levels, vote case-by-case, taking into account:
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Quorum requirements; and |
14 “Unfettered” means no
restrictions on agenda items, no restrictions on the number of shareholders who
can group together to reach the 10 percent threshold, and only reasonable
limits on when a meeting can be called: no greater than 30 days after the last
annual meeting and no greater than 90 prior to the next annual meeting.
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C-33 |
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Virtual Shareholder Meetings
General
Recommendation: Generally vote for
management proposals allowing for the convening of shareholder meetings by
electronic means, so long as they do not preclude in-person meetings. Companies are encouraged
to disclose the circumstances under which virtual-only15 meetings would be held,
and to allow for comparable rights and opportunities for shareholders to
participate electronically as they would have during an in-person meeting.
Vote
case-by-case on shareholder proposals
concerning virtual-only meetings, considering:
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Scope and rationale of the proposal; and
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Concerns identified with the company’s prior meeting practices.
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15 Virtual-only
shareholder meeting” refers to a meeting of shareholders that is held
exclusively using technology without a corresponding in-person meeting.
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C-34 |
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4. Capital/Restructuring
Capital
Adjustments to Par Value of Common
Stock
General
Recommendation: Vote for management
proposals to reduce the par value of common stock unless the action is being
taken to facilitate an anti-takeover device or some other negative corporate
governance action.
Vote
for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
General
Recommendation: Vote case-by-case on proposals to increase
the number of authorized shares of common stock that are to be used for general
corporate purposes:
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If share usage (outstanding plus reserved) is less than 50% of
the current authorized shares, vote for an increase of up to 50% of
current authorized shares. |
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If share usage is 50% to 100% of the current authorized, vote
for an increase of up to 100% of current authorized shares.
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If share usage is greater than current authorized shares, vote
for an increase of up to the current share usage. |
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In the case of a stock split, the allowable increase is
calculated (per above) based on the post-split adjusted authorization.
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Generally
vote against proposed increases, even if within the above ratios, if the
proposal or the company’s prior or ongoing use of authorized shares is
problematic, including, but not limited to:
| |
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The proposal seeks to increase the number of authorized shares
of the class of common stock that has superior voting rights to other
share classes; |
| |
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On the same ballot is a proposal for a reverse split for which
support is warranted despite the fact that it would result in an excessive
increase in the share authorization; |
| |
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The company has a non-shareholder approved poison pill
(including an NOL pill); or |
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The company has previous sizeable placements (within the past 3
years) of stock with insiders at prices substantially below market value,
or with problematic voting rights, without shareholder approval.
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However,
generally vote for proposed increases beyond the above ratios or problematic
situations when there is disclosure of specific and severe risks to shareholders
of not approving the request, such as:
| |
◾ |
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In, or subsequent to, the company’s most recent 10-K filing, the company discloses that
there is substantial doubt about its ability to continue as a going
concern; |
| |
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The company states that there is a risk of imminent bankruptcy
or imminent liquidation if shareholders do not approve the increase in
authorized capital; or |
| |
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A government body has in the past year required the company to
increase its capital ratios. |
For
companies incorporated in states that allow increases in authorized capital
without shareholder approval, generally vote withhold or against all nominees if
a unilateral capital authorization increase does not conform to the above
policies.
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C-35 |
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35 of 81 |
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Specific Authorization Requests
General
Recommendation: Generally vote for
proposals to increase the number of authorized common shares where the primary
purpose of the increase is to issue shares in connection with transaction(s)
(such as acquisitions, SPAC transactions, private placements, or similar
transactions) on the same ballot, or disclosed in the proxy statement, that
warrant support. For such transactions, the allowable increase will be the
greater of:
| |
◾ |
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twice the amount needed to support the transactions on the
ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances
above. |
Dual Class Structure
General
Recommendation: Generally vote
against proposals to create a new class of common stock unless:
| |
◾ |
|
The company discloses a compelling rationale for the dual-class
capital structure, such as: |
| |
◾ |
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The company’s auditor has concluded that there is substantial
doubt about the company’s ability to continue as a going concern; or
|
| |
◾ |
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The new class of shares will be transitory;
|
| |
◾ |
|
The new class is intended for financing purposes with minimal
or no dilution to current shareholders in both the short term and long
term; and |
| |
◾ |
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The new class is not designed to preserve or increase the
voting power of an insider or significant shareholder.
|
Issue Stock for Use with Rights Plan
General
Recommendation: Vote against
proposals that increase authorized common stock for the explicit purpose of
implementing a non-shareholder-approved
shareholder rights plan (poison pill).
Preemptive Rights
General
Recommendation: Vote case-by-case on shareholder proposals
that seek preemptive rights, taking into consideration:
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The size of the company; |
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|
The shareholder base; and |
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◾ |
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The liquidity of the stock. |
Preferred Stock Authorization
General Authorization Requests
General
Recommendation: Vote case-by-case on proposals to increase
the number of authorized shares of preferred stock that are to be used for
general corporate purposes:
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◾ |
|
If share usage (outstanding plus reserved) is less than 50% of
the current authorized shares, vote for an increase of up to 50% of
current authorized shares. |
| |
◾ |
|
If share usage is 50% to 100% of the current authorized, vote
for an increase of up to 100% of current authorized shares.
|
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◾ |
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If share usage is greater than current authorized shares, vote
for an increase of up to the current share usage. |
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C-36 |
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36 of 81 |
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In the case of a stock split, the allowable increase is
calculated (per above) based on the post-split adjusted authorization.
|
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If no preferred shares are currently issued and outstanding,
vote against the request, unless the company discloses a specific use for
the shares. |
Generally
vote against proposed increases, even if within the above ratios, if the
proposal or the company’s prior or ongoing use of authorized shares is
problematic, including, but not limited to:
| |
◾ |
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If the shares requested are blank check preferred shares that
can be used for antitakeover purposes;16
|
| |
◾ |
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The company seeks to increase a class of non-convertible preferred shares
entitled to more than one vote per share on matters that do not solely
affect the rights of preferred stockholders “supervoting shares”);
|
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The company seeks to increase a class of convertible preferred
shares entitled to a number of votes greater than the number of common
shares into which they are convertible (“supervoting shares”) on matters
that do not solely affect the rights of preferred stockholders;
|
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The stated intent of the increase in the general authorization
is to allow the company to increase an existing designated class of
supervoting preferred shares; |
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On the same ballot is a proposal for a reverse split for which
support is warranted despite the fact that it would result in an excessive
increase in the share authorization; |
| |
◾ |
|
The company has a non-shareholder approved poison pill
(including an NOL pill); or |
| |
◾ |
|
The company has previous sizeable placements (within the past 3
years) of stock with insiders at prices substantially below market value,
or with problematic voting rights, without shareholder approval.
|
However,
generally vote for proposed increases beyond the above ratios or problematic
situations when there is disclosure of specific and severe risks to shareholders
of not approving the request, such as:
| |
◾ |
|
In, or subsequent to, the company’s most recent 10-K filing, the company discloses that
there is substantial doubt about its ability to continue as a going
concern; |
| |
◾ |
|
The company states that there is a risk of imminent bankruptcy
or imminent liquidation if shareholders do not approve the increase in
authorized capital; or |
| |
◾ |
|
A government body has in the past year required the company to
increase its capital ratios. |
For
companies incorporated in states that allow increases in authorized capital
without shareholder approval, generally vote withhold or against all nominees if
a unilateral capital authorization increase does not conform to the above
policies.
Specific
Authorization Requests
General
Recommendation: Generally vote for
proposals to increase the number of authorized preferred shares where the
primary purpose of the increase is to issue shares in connection with
transaction(s) (such as acquisitions, SPAC transactions, private placements, or
similar transactions) on the same ballot, or disclosed in the proxy statement,
that warrant support. For such transactions, the allowable increase will be the
greater of:
| |
◾ |
|
twice the amount needed to support the transactions on the
ballot, and |
| |
◾ |
|
the allowable increase as calculated for general issuances
above. |
16 To be acceptable,
appropriate disclosure would be needed that the shares are “declawed”: i.e.,
representation by the board that it will not, without prior stockholder
approval, issue or use the preferred stock for any defensive or anti-takeover
purpose or for the purpose of implementing any stockholder rights plan.
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C-37 |
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37 of 81 |
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Recapitalization Plans
General
Recommendation: Vote case-by-case on recapitalizations
(reclassifications of securities), taking into account the following:
| |
◾ |
|
More simplified capital structure; |
| |
◾ |
|
Fairness of conversion terms; |
| |
◾ |
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Impact on voting power and dividends; |
| |
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|
Reasons for the reclassification; |
| |
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|
Conflicts of interest; and |
| |
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Other alternatives considered. |
Reverse Stock Splits
General
Recommendation: Vote for management
proposals to implement a reverse stock split if:
| |
◾ |
|
The number of authorized shares will be proportionately
reduced; or |
| |
◾ |
|
The effective increase in authorized shares is equal to or less
than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
|
Vote
case-by-case on proposals that do not
meet either of the above conditions, taking into consideration the following
factors:
| |
◾ |
|
Stock exchange notification to the company of a potential
delisting; |
| |
◾ |
|
Disclosure of substantial doubt about the company’s ability to
continue as a going concern without additional financing;
|
| |
◾ |
|
The company’s rationale; or |
| |
◾ |
|
Other factors as applicable. |
Share Issuance Mandates at U.S.
Domestic Issuers Incorporated Outside the U.S.
General
Recommendation: For U.S. domestic
issuers incorporated outside the U.S. and listed solely on a U.S. exchange,
generally vote for resolutions to authorize the issuance of common shares up to
20 percent of currently issued common share capital, where not tied to a
specific transaction or financing proposal.
For
pre-revenue or other early-stage
companies that are heavily reliant on periodic equity financing, generally vote
for resolutions to authorize the issuance of common shares up to 50 percent
of currently issued common share capital. The burden of proof will be on the
company to establish that it has a need for the higher limit.
Renewal
of such mandates should be sought at each year’s annual meeting.
Vote
case-by-case on share issuances for a
specific transaction or financing proposal.
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C-38 |
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38 of 81 |
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Share Repurchase Programs
General
Recommendation: For
U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that
are traded solely on U.S. exchanges, vote for management proposals to
institute open-market share repurchase plans in which all shareholders may
participate on equal terms, or to grant the board authority to conduct
open-market repurchases, in the absence of company-specific concerns regarding:
| |
◾ |
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The use of buybacks to inappropriately manipulate incentive
compensation metrics; |
| |
◾ |
|
Threats to the company’s long-term viability; or
|
| |
◾ |
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Other company-specific factors as warranted.
|
Vote
case-by-case on proposals to
repurchase shares directly from specified shareholders, balancing the stated
rationale against the possibility for the repurchase authority to be misused,
such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder
Proposals
General
Recommendation: Generally vote
against shareholder proposals prohibiting executives from selling shares of
company stock during periods in which the company has announced that it may or
will be repurchasing shares of its stock. Vote for the proposal when there is a
pattern of abuse by executives exercising options or selling shares during
periods of share buybacks.
Stock Distributions: Splits and
Dividends
General
Recommendation: Generally vote for
management proposals to increase the common share authorization for stock split
or stock dividend, provided that the effective increase in authorized shares is
equal to or is less than the allowable increase calculated in accordance with
ISS’ Common Stock Authorization policy.
Tracking Stock
General
Recommendation: Vote case-by-case on the creation of
tracking stock, weighing the strategic value of the transaction against such
factors as:
| |
◾ |
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Adverse governance changes; |
| |
◾ |
|
Excessive increases in authorized capital stock;
|
| |
◾ |
|
Unfair method of distribution; |
| |
◾ |
|
Diminution of voting rights; |
| |
◾ |
|
Adverse conversion features; |
| |
◾ |
|
Negative impact on stock option plans; and
|
| |
◾ |
|
Alternatives such as spin-off. |
Restructuring
Appraisal Rights
General
Recommendation: Vote for proposals
to restore or provide shareholders with rights of appraisal.
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C-39 |
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39 of 81 |
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Asset Purchases
General
Recommendation: Vote case-by-case on asset purchase
proposals, considering the following factors:
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
How the deal was negotiated; |
| |
◾ |
|
Other alternatives for the business; |
Asset Sales
General
Recommendation: Vote case-by-case on asset sales,
considering the following factors:
| |
◾ |
|
Impact on the balance sheet/working capital;
|
| |
◾ |
|
Potential elimination of diseconomies; |
| |
◾ |
|
Anticipated financial and operating benefits;
|
| |
◾ |
|
Anticipated use of funds; |
| |
◾ |
|
Value received for the asset; |
| |
◾ |
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How the deal was negotiated; |
Bundled Proposals
General
Recommendation: Vote case-by-case on bundled or
“conditional” proxy proposals. In the case of items that are conditioned upon
each other, examine the benefits and costs of the packaged items. In instances
when the joint effect of the conditioned items is not in shareholders’ best
interests, vote against the proposals. If the combined effect is positive,
support such proposals.
Conversion of Securities
General
Recommendation: Vote case-by-case on proposals regarding
conversion of securities. When evaluating these proposals, the investor should
review the dilution to existing shareholders, the conversion price relative to
market value, financial issues, control issues, termination penalties, and
conflicts of interest.
Vote
for the conversion if it is expected that the company will be subject to onerous
penalties or will be forced to file for bankruptcy if the transaction is not
approved.
Corporate Reorganization/Debt
Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
General
Recommendation: Vote case-by-case on proposals to increase
common and/or preferred shares and to issue shares as part of a debt
restructuring plan, after evaluating:
| |
◾ |
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Dilution to existing shareholders’ positions;
|
| |
◾ |
|
Terms of the offer - discount/premium in purchase price to
investor, including any fairness opinion; termination penalties; exit
strategy; |
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C-40 |
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40 of 81 |
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Financial issues - company’s financial situation; degree of
need for capital; use of proceeds; effect of the financing on the
company’s cost of capital; |
| |
◾ |
|
Management’s efforts to pursue other alternatives;
|
| |
◾ |
|
Control issues - change in management; change in control,
guaranteed board and committee seats; standstill provisions; voting
agreements; veto power over certain corporate actions; and
|
| |
◾ |
|
Conflict of interest - arm’s length transaction, managerial
incentives. |
Vote
for the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
Formation of Holding Company
General
Recommendation: Vote case-by-case on proposals regarding
the formation of a holding company, taking into consideration the following:
| |
◾ |
|
The reasons for the change; |
| |
◾ |
|
Any financial or tax benefits; |
| |
◾ |
|
Increases in capital structure; and |
| |
◾ |
|
Changes to the articles of incorporation or bylaws of the
company. |
Absent
compelling financial reasons to recommend for the transaction, vote against the
formation of a holding company if the transaction would include either of the
following:
| |
◾ |
|
Increases in common or preferred stock in excess of the
allowable maximum (see discussion under “Capital”); or
|
| |
◾ |
|
Adverse changes in shareholder rights. |
Going Private and Going Dark
Transactions (LBOs and Minority Squeeze-outs)
General
Recommendation: Vote case-by-case on going private
transactions, taking into account the following:
| |
◾ |
|
How the deal was negotiated; |
| |
◾ |
|
Other alternatives/offers considered; and
|
Vote
case-by-case on going dark
transactions, determining whether the transaction enhances shareholder value by
taking into consideration:
| |
◾ |
|
Whether the company has attained benefits from being
publicly-traded (examination of trading volume, liquidity, and market
research of the stock); |
| |
◾ |
|
Balanced interests of continuing vs. cashed-out shareholders, taking into
account the following: |
| |
◾ |
|
Are all shareholders able to participate in the transaction?
|
| |
◾ |
|
Will there be a liquid market for remaining shareholders
following the transaction? |
| |
◾ |
|
Does the company have strong corporate governance?
|
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◾ |
|
Will insiders reap the gains of control following the proposed
transaction? |
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◾ |
|
Does the state of incorporation have laws requiring continued
reporting that may benefit shareholders? |
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C-41 |
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41 of 81 |
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Joint Ventures
General
Recommendation: Vote case-by-case on proposals to form
joint ventures, taking into account the following:
| |
◾ |
|
Percentage of assets/business contributed;
|
| |
◾ |
|
Financial and strategic benefits; |
| |
◾ |
|
Other alternatives; and |
Liquidations
General
Recommendation: Vote case-by-case on liquidations, taking
into account the following:
| |
◾ |
|
Management’s efforts to pursue other alternatives;
|
| |
◾ |
|
Appraisal value of assets; and |
| |
◾ |
|
The compensation plan for executives managing the liquidation.
|
Vote
for the liquidation if the company will file for bankruptcy if the proposal is
not approved.
Mergers and Acquisitions
General
Recommendation: Vote case-by-case on mergers and
acquisitions. Review and evaluate the merits and drawbacks of the proposed
transaction, balancing various and sometimes countervailing factors including:
| |
◾ |
|
Valuation - Is the value to be received by the target
shareholders (or paid by the acquirer) reasonable? While the fairness
opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market reaction,
and strategic rationale. |
| |
◾ |
|
Market reaction - How has the market responded to the
proposed deal? A negative market reaction should cause closer scrutiny of
a deal. |
| |
◾ |
|
Strategic rationale - Does the deal make sense
strategically? From where is the value derived? Cost and revenue synergies
should not be overly aggressive or optimistic, but reasonably achievable.
Management should also have a favorable track record of successful
integration of historical acquisitions. |
| |
◾ |
|
Negotiations and process - Were the terms of the
transaction negotiated at arm’s-length? Was the process fair and
equitable? A fair process helps to ensure the best price for shareholders.
Significant negotiation “wins” can also signify the deal makers’
competency. The comprehensiveness of the sales process (e.g., full
auction, partial auction, no auction) can also affect shareholder value.
|
| |
◾ |
|
Conflicts of interest - Are insiders benefiting from the
transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result
of potential conflicts, the directors and officers of the company may be
more likely to vote to approve a merger than if they did not hold these
interests. Consider whether these interests may have influenced these
directors and officers to support or recommend the merger. The CIC figure
presented in the “ISS Transaction Summary” section of this report is an
aggregate figure that can in certain cases be a misleading indicator of
the true value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to determine
whether a potential conflict exists. |
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C-42 |
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42 of 81 |
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Governance - Will the combined company have a better or
worse governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
|
Private
Placements/Warrants/Convertible Debentures
General
Recommendation: Vote case-by-case on proposals regarding
private placements, warrants, and convertible debentures taking into
consideration:
| |
◾ |
|
Dilution to existing shareholders’ position: The amount and
timing of shareholder ownership dilution should be weighed against the
needs and proposed shareholder benefits of the capital infusion. Although
newly issued common stock, absent preemptive rights, is typically dilutive
to existing shareholders, share price appreciation is often the necessary
event to trigger the exercise of “out of the money” warrants and
convertible debt. In these instances from a value standpoint, the negative
impact of dilution is mitigated by the increase in the company’s stock
price that must occur to trigger the dilutive event.
|
| |
◾ |
|
Terms of the offer (discount/premium in purchase price to
investor, including any fairness opinion, conversion features, termination
penalties, exit strategy): |
| |
◾ |
|
The terms of the offer should be weighed against the
alternatives of the company and in light of company’s financial condition.
Ideally, the conversion price for convertible debt and the exercise price
for warrants should be at a premium to the then prevailing stock price at
the time of private placement. |
| |
◾ |
|
When evaluating the magnitude of a private placement discount
or premium, consider factors that influence the discount or premium, such
as, liquidity, due diligence costs, control and monitoring costs, capital
scarcity, information asymmetry, and anticipation of future performance.
|
| |
◾ |
|
The company’s financial condition; |
| |
◾ |
|
Degree of need for capital; |
| |
◾ |
|
Effect of the financing on the company’s cost of capital;
|
| |
◾ |
|
Current and proposed cash burn rate; |
| |
◾ |
|
Going concern viability and the state of the capital and credit
markets. |
| |
◾ |
|
Management’s efforts to pursue alternatives and whether the
company engaged in a process to evaluate alternatives: A fair,
unconstrained process helps to ensure the best price for shareholders.
Financing alternatives can include joint ventures, partnership, merger, or
sale of part or all of the company. |
| |
◾ |
|
Guaranteed board and committee seats; |
| |
◾ |
|
Veto power over certain corporate actions; and
|
| |
◾ |
|
Minority versus majority ownership and corresponding minority
discount or majority control premium. |
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C-43 |
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43 of 81 |
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Conflicts of interest should be viewed from the perspective of
the company and the investor. |
| |
◾ |
|
Were the terms of the transaction negotiated at arm’s length?
Are managerial incentives aligned with shareholder interests?
|
| |
◾ |
|
The market’s response to the proposed deal. A negative market
reaction is a cause for concern. Market reaction may be addressed by
analyzing the one-day impact on
the unaffected stock price. |
Vote
for the private placement, or for the issuance of warrants and/or convertible
debentures in a private placement, if it is expected that the company will file
for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan
(Bankruptcy)
General
Recommendation: Vote case-by-case on proposals to common
shareholders on bankruptcy plans of reorganization, considering the following
factors including, but not limited to:
| |
◾ |
|
Estimated value and financial prospects of the reorganized
company; |
| |
◾ |
|
Percentage ownership of current shareholders in the reorganized
company; |
| |
◾ |
|
Whether shareholders are adequately represented in the
reorganization process (particularly through the existence of an Official
Equity Committee); |
| |
◾ |
|
The cause(s) of the bankruptcy filing, and the extent to which
the plan of reorganization addresses the cause(s);
|
| |
◾ |
|
Existence of a superior alternative to the plan of
reorganization; and |
| |
◾ |
|
Governance of the reorganized company. |
Special Purpose Acquisition
Corporations (SPACs)
General
Recommendation: Vote case-by-case on SPAC mergers and
acquisitions taking into account the following:
| |
◾ |
|
Valuation - Is the value being paid by the SPAC
reasonable? SPACs generally lack an independent fairness opinion and the
financials on the target may be limited. Compare the conversion price with
the intrinsic value of the target company provided in the fairness
opinion. Also, evaluate the proportionate value of the combined entity
attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally,
a private company discount may be applied to the target if it is a private
entity. |
| |
◾ |
|
Market reaction - How has the market responded to the
proposed deal? A negative market reaction may be a cause for concern.
Market reaction may be addressed by analyzing the one-day impact on the unaffected stock
price. |
| |
◾ |
|
Deal timing - A main driver for most transactions is
that the SPAC charter typically requires the deal to be complete within 18
to 24 months, or the SPAC is to be liquidated. Evaluate the valuation,
market reaction, and potential conflicts of interest for deals that are
announced close to the liquidation date. |
| |
◾ |
|
Negotiations and process - What was the process
undertaken to identify potential target companies within specified
industry or location specified in charter? Consider the background of the
sponsors. |
| |
◾ |
|
Conflicts of interest - How are sponsors benefiting from
the transaction compared to IPO shareholders? Potential conflicts could
arise if a fairness opinion is issued by the insiders to qualify the deal
rather than a third party or if management is encouraged to pay a higher
price for the target because of an 80 percent rule (the charter
requires that the fair market value of the target is at least equal to
80 percent of net assets of the SPAC). Also, there may be sense of
urgency by the management team of the SPAC to close the deal since its
charter typically requires a transaction to be completed within the 18-24-month timeframe.
|
| |
◾ |
|
Voting agreements - Are the sponsors entering into enter
into any voting agreements/tender offers with shareholders who are likely
to vote against the proposed merger or exercise conversion rights?
|
| |
◾ |
|
Governance - What is the impact of having the SPAC CEO
or founder on key committees following the proposed merger?
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C-44 |
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44 of 81 |
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Special Purpose Acquisition
Corporations (SPACs) - Proposals for Extensions
General
Recommendation: Vote case-by-case on SPAC extension
proposals taking into account the length of the requested extension, the status
of any pending transaction(s) or progression of the acquisition process, any
added incentive for non-redeeming
shareholders, and any prior extension requests.
| |
◾ |
|
Length of request: Typically, extension requests range
from two to six months, depending on the progression of the SPAC’s
acquistion process. |
| |
◾ |
|
Pending transaction(s) or progression of the
acquisition process: Sometimes an intial business combination was
already put to a shareholder vote, but, for varying reasons, the
transaction could not be consummated by the termination date and the SPAC
is requesting an extension. Other times, the SPAC has entered into a
definitive transaction agreement, but needs additional time to consummate
or hold the shareholder meeting. |
| |
◾ |
|
Added incentive for non-redeeming shareholders:
Sometimes the SPAC sponsor (or other insiders) will contribute, typically
as a loan to the company, additional funds that will be added to the
redemption value of each public share as long as such shares are not
redeemed in connection with the extension request. The purpose of the
“equity kicker” is to incentivize shareholders to hold their shares
through the end of the requested extension or until the time the
transaction is put to a shareholder vote, rather than electing redeemption
at the extension proposal meeting. |
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|
Prior extension requests: Some SPACs request additional
time beyond the extension period sought in prior extension requests.
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Spin-offs
General
Recommendation: Vote case-by-case on spin-offs,
considering:
| |
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Tax and regulatory advantages; |
| |
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|
Planned use of the sale proceeds; |
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Benefits to the parent company; |
| |
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|
Corporate governance changes; |
| |
◾ |
|
Changes in the capital structure. |
Value Maximization Shareholder
Proposals
General
Recommendation: Vote case-by-case on shareholder proposals
seeking to maximize shareholder value by:
| |
◾ |
|
Hiring a financial advisor to explore strategic alternatives;
|
| |
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|
Selling the company; or |
| |
◾ |
|
Liquidating the company and distributing the proceeds to
shareholders. |
These
proposals should be evaluated based on the following factors:
| |
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Prolonged poor performance with no turnaround in sight;
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Signs of entrenched board and management (such as the adoption
of takeover defenses); |
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Strategic plan in place for improving value;
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Likelihood of receiving reasonable value in a sale or
dissolution; and |
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The company actively exploring its strategic options, including
retaining a financial advisor. |
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5. Compensation
Executive Pay Evaluation
Underlying
all evaluations are five global principles that most investors expect
corporations to adhere to in designing and administering executive and director
compensation programs:
| |
1. |
Maintain appropriate pay-for-performance alignment,
with emphasis on long-term shareholder value: This principle encompasses
overall executive pay practices, which must be designed to attract,
retain, and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration, among
other factors, the link between pay and performance; the mix between fixed
and variable pay; performance goals; and equity-based plan costs;
|
| |
2. |
Avoid arrangements that risk “pay for failure”: This principle
addresses the appropriateness of long or indefinite contracts, excessive
severance packages, and guaranteed compensation; |
| |
3. |
Maintain an independent and effective compensation committee:
This principle promotes oversight of executive pay programs by directors
with appropriate skills, knowledge, experience, and a sound process for
compensation decision-making (e.g., including access to independent
expertise and advice when needed); |
| |
4. |
Provide shareholders with clear, comprehensive compensation
disclosures: This principle underscores the importance of informative and
timely disclosures that enable shareholders to evaluate executive pay
practices fully and fairly; |
| |
5. |
Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in ensuring that compensation to
outside directors is reasonable and does not compromise their independence
and ability to make appropriate judgments in overseeing managers’ pay and
performance. At the market level, it may incorporate a variety of
generally accepted best practices. |
Advisory Votes on Executive
Compensation—Management Proposals (Say-on-Pay)
General
Recommendation: Vote case-by-case on ballot items related
to executive pay and practices, as well as certain aspects of outside director
compensation.
Vote
against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
| |
◾ |
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There is an unmitigated misalignment between CEO pay and
company performance (pay for
performance); |
| |
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The company maintains significant problematic pay practices;
|
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|
The board exhibits a significant level of poor communication and responsiveness to
shareholders. |
Vote
against or withhold from the members of the Compensation Committee and
potentially the full board if:
| |
◾ |
|
There is no SOP on the ballot, and an against vote on an SOP
would otherwise be warranted due to pay-for-performance
misalignment, problematic pay practices, or the lack of adequate
responsiveness on compensation issues raised previously, or a combination
thereof; |
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The board fails to respond adequately to a previous SOP
proposal that received less than 70 percent support of votes cast;
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The company has recently practiced or approved problematic pay
practices, such as option repricing or option backdating; or
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The situation is egregious. |
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Primary
Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS
annually conducts a pay-for-performance analysis to
identify strong or satisfactory alignment between pay and performance over a
sustained period. With respect to companies in the S&P1500, Russell 3000, or
Russell 3000E Indices17, this analysis
considers the following:
| |
1. |
Peer Group18 Alignment:
|
| |
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|
The degree of alignment between the company’s annualized TSR
rank and the CEO’s annualized total pay rank within a peer group, each
measured over a three-year period. |
| |
◾ |
|
The rankings of CEO total pay and company financial performance
within a peer group, each measured over a three-year period.
|
| |
◾ |
|
The multiple of the CEO’s total pay relative to the peer group
median in the most recent fiscal year. |
| |
2. |
Absolute Alignment19 – the absolute
alignment between the trend in CEO pay and company TSR over the prior five
fiscal years – i.e., the difference between the trend in annual pay
changes and the trend in annualized TSR during the period.
|
If
the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in
the case of companies outside the Russell indices, a misalignment between pay
and performance is otherwise suggested, our analysis may include any of the
following qualitative factors, as relevant to an evaluation of how various pay
elements may work to encourage or to undermine long-term value creation and
alignment with shareholder interests:
| |
◾ |
|
The ratio of performance- to time-based incentive awards;
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| |
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|
The overall ratio of performance-based compensation to fixed or
discretionary pay; |
| |
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The rigor of performance goals; |
| |
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|
The complexity and risks around pay program design;
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The transparency and clarity of disclosure;
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|
The company’s peer group benchmarking practices;
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|
Financial/operational results, both absolute and relative to
peers; |
| |
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|
Special circumstances related to, for example, a new CEO in the
prior FY or anomalous equity grant practices (e.g., bi-annual awards);
|
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|
Realizable pay20 compared to grant
pay; and |
| |
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|
Any other factors deemed relevant. |
17 The Russell
3000E Index includes approximately
4,000 of the largest U.S. equity securities.
18 The revised peer group
is generally comprised of 14-24
companies that are selected using market cap, revenue (or assets for certain
financial firms), GICS industry group, and company’s selected peers’ GICS
industry group, with size constraints, via a process designed to select peers
that are comparable to the subject company in terms of revenue/assets and
industry, and also within a market-cap
bucket that is reflective of the company’s market cap. For Oil, Gas &
Consumable Fuels companies, market cap is the only size determinant.
19 Only Russell 3000 Index
companies are subject to the Absolute Alignment analysis.
20 ISS research reports
include realizable pay for S&P1500 companies.
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Problematic Pay Practices
Problematic
pay elements are generally evaluated case-by-case considering the context
of a company’s overall pay program and demonstrated pay-for-performance philosophy. The
focus is on executive compensation practices that contravene the global pay
principles, including:
| |
◾ |
|
Problematic practices related to non-performance-based compensation
elements; |
| |
◾ |
|
Incentives that may motivate excessive risk-taking or present a
windfall risk; and |
| |
◾ |
|
Pay decisions that circumvent pay-for-performance, such as
options backdating or waiving performance requirements.
|
The
list of examples below highlights certain problematic practices that carry
significant weight in this overall consideration and may result in adverse vote
recommendations:
| |
◾ |
|
Repricing or replacing of underwater stock options/SARs without
prior shareholder approval (including cash buyouts and voluntary surrender
of underwater options); |
| |
◾ |
|
Extraordinary perquisites or tax gross-ups; |
| |
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New or materially amended agreements that provide for:
|
| |
◾ |
|
Excessive termination or CIC severance payments (generally
exceeding 3 times base salary and average/target/most recent bonus);
|
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◾ |
|
CIC severance payments without involuntary job loss or
substantial diminution of duties (“single” or “modified single” triggers)
or in connection with a problematic Good Reason definition;
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| |
◾ |
|
CIC excise tax gross-up entitlements (including
“modified” gross-ups);
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| |
◾ |
|
Multi-year guaranteed awards that are not at risk due to
rigorous performance conditions; |
| |
◾ |
|
Liberal CIC definition combined with any single-trigger CIC
benefits; |
| |
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|
Insufficient executive compensation disclosure by
externally-managed issuers (EMIs) such that a reasonable assessment of pay
programs and practices applicable to the EMI’s executives is not possible;
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Severance payments made when the termination is not clearly
disclosed as involuntary (for example, a termination without cause or
resignation for good reason); |
| |
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Any other provision or practice deemed to be egregious and
present a significant risk to investors. |
The
above examples are not an exhaustive list. Please refer to ISS’ U.S. Compensation
Policies FAQ document for additional
detail on specific pay practices that have been identified as problematic and
may lead to negative vote recommendations.
Options
Backdating
The
following factors should be examined case-by-case to allow for distinctions
to be made between “sloppy” plan administration versus deliberate action or
fraud:
| |
◾ |
|
Reason and motive for the options backdating issue, such as
inadvertent vs. deliberate grant date changes; |
| |
◾ |
|
Duration of options backdating; |
| |
◾ |
|
Size of restatement due to options backdating;
|
| |
◾ |
|
Corrective actions taken by the board or compensation
committee, such as canceling or re-pricing backdated options, the
recouping of option gains on backdated grants; and
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| |
◾ |
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Adoption of a grant policy that prohibits backdating and
creates a fixed grant schedule or window period for equity grants in the
future. |
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Compensation Committee Communications
and Responsiveness
Consider
the following factors case-by-case when evaluating ballot
items related to executive pay on the board’s responsiveness to investor input
and engagement on compensation issues:
| |
◾ |
|
Failure to respond to majority-supported shareholder proposals
on executive pay topics; or |
| |
◾ |
|
Failure to adequately respond to the company’s previous say-on-pay proposal that
received the support of less than 70 percent of votes cast, taking
into account: |
| |
◾ |
|
Disclosure of engagement efforts with major institutional
investors, including the frequency and timing of engagements and the
company participants (including whether independent directors
participated); |
| |
◾ |
|
Disclosure of the specific concerns voiced by dissenting
shareholders that led to the say-on-pay opposition;
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| |
◾ |
|
Disclosure of specific and meaningful actions taken to address
shareholders’ concerns; |
| |
◾ |
|
Other recent compensation actions taken by the company;
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| |
◾ |
|
Whether the issues raised are recurring or isolated;
|
| |
◾ |
|
The company’s ownership structure; and |
| |
◾ |
|
Whether the support level was less than 50 percent, which
would warrant the highest degree of responsiveness.
|
Frequency of Advisory Vote on
Executive Compensation (“Say When on Pay”)
General
Recommendation: Vote for annual
advisory votes on compensation, which provide the most consistent and clear
communication channel for shareholder concerns about companies’ executive pay
programs.
Voting on Golden Parachutes in an
Acquisition, Merger, Consolidation, or Proposed Sale
General
Recommendation: Vote case-by-case on say on Golden
Parachute proposals, including consideration of existing change-in-control arrangements
maintained with named executive officers but also considering new or extended
arrangements.
Features
that may result in an “against” recommendation include one or more of the
following, depending on the number, magnitude, and/or timing of issue(s):
| |
◾ |
|
Single- or modified-single-trigger cash severance;
|
| |
◾ |
|
Single-trigger acceleration of unvested equity awards;
|
| |
◾ |
|
Full acceleration of equity awards granted shortly before the
change in control; |
| |
◾ |
|
Acceleration of performance awards above the target level of
performance without compelling rationale; |
| |
◾ |
|
Excessive cash severance (generally >3x base salary and
bonus); |
| |
◾ |
|
Excise tax gross-ups
triggered and payable; |
| |
◾ |
|
Excessive golden parachute payments (on an absolute basis or as
a percentage of transaction equity value); or |
| |
◾ |
|
Recent amendments that incorporate any problematic features
(such as those above) or recent actions (such as extraordinary equity
grants) that may make packages so attractive as to influence merger
agreements that may not be in the best interests of shareholders; or
|
| |
◾ |
|
The company’s assertion that a proposed transaction is
conditioned on shareholder approval of the golden parachute advisory vote.
|
Recent
amendment(s) that incorporate problematic features will tend to carry more
weight on the overall analysis. However, the presence of multiple legacy
problematic features will also be closely scrutinized.
In
cases where the golden parachute vote is incorporated into a company’s advisory
vote on compensation (management say-on-pay), ISS will evaluate the
say-on-pay proposal in accordance with
these guidelines, which may give higher weight to that component of the overall
evaluation.
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Equity-Based and Other Incentive Plans
Please
refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan
Scorecard policy.
General
Recommendation: Vote case-by-case on certain equity-based
compensation plans21 depending on a
combination of certain plan features and equity grant practices, where positive
factors may counterbalance negative factors, and vice versa, as evaluated using
an “Equity Plan Scorecard” (EPSC) approach with three pillars:
| |
◾ |
|
Plan Cost: The total estimated cost of the company’s
equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) in relation to peers
and considering both: |
| |
◾ |
|
SVT based on new shares requested plus shares remaining for
future grants, plus outstanding unvested/unexercised grants; and
|
| |
◾ |
|
SVT based only on new shares requested plus shares remaining
for future grants. |
| |
◾ |
|
Quality of disclosure around vesting upon a change in control
(CIC); |
| |
◾ |
|
Discretionary vesting authority; |
| |
◾ |
|
Liberal share recycling on various award types;
|
| |
◾ |
|
Lack of minimum vesting period for grants made under the plan;
|
| |
◾ |
|
Dividends payable prior to award vesting.
|
| |
◾ |
|
The company’s three-year burn rate relative to its
industry/market cap peers; |
| |
◾ |
|
Vesting requirements in CEO’s recent equity grants (3-year look-back);
|
| |
◾ |
|
The estimated duration of the plan (based on the sum of shares
remaining available and the new shares requested, divided by the average
annual shares granted in the prior three years); |
| |
◾ |
|
The proportion of the CEO’s most recent equity grants/awards
subject to performance conditions; |
| |
◾ |
|
Whether the company maintains a sufficient claw-back policy;
|
| |
◾ |
|
Whether the company maintains sufficient post-exercise/vesting
share-holding requirements. |
Generally
vote against the plan proposal if the combination of above factors indicates
that the plan is not, overall, in shareholders’ interests, or if any of the
following egregious factors (“overriding factors”) apply:
| |
◾ |
|
Awards may vest in connection with a liberal change-of-control definition;
|
| |
◾ |
|
The plan would permit repricing or cash buyout of underwater
options without shareholder approval (either by expressly permitting it –
for NYSE and Nasdaq listed companies – or by not prohibiting it when the
company has a history of repricing – for non-listed companies);
|
| |
◾ |
|
The plan is a vehicle for problematic pay practices or a
significant pay-for-performance disconnect
under certain circumstances; |
| |
◾ |
|
The plan is excessively dilutive to shareholders’ holdings;
|
| |
◾ |
|
The plan contains an evergreen (automatic share replenishment)
feature; or |
| |
◾ |
|
Any other plan features are determined to have a significant
negative impact on shareholder interests. |
21 Proposals evaluated
under the EPSC policy generally include those to approve or amend (1) stock
option plans for employees and/or employees and directors, (2) restricted
stock plans for employees and/or employees and directors, and (3) omnibus
stock incentive plans for employees and/or employees and directors; amended
plans will be further evaluated case-by-case.
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Further
Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The
cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which
is measured using a binomial option pricing model that assesses the amount of
shareholders’ equity flowing out of the company to employees and directors. SVT
is expressed as both a dollar amount and as a percentage of market value, and
includes the new shares proposed, shares available under existing plans, and
shares granted but unexercised (using two measures, in the case of plans subject
to the Equity Plan Scorecard evaluation, as noted above). All award types are
valued. For omnibus plans, unless limitations are placed on the most expensive
types of awards (for example, full-value awards), the assumption is made that
all awards to be granted will be the most expensive types.
For
proposals that are not subject to the Equity Plan Scorecard evaluation,
Shareholder Value Transfer is reasonable if it falls below a company-specific
benchmark. The benchmark is determined as follows: The top quartile performers
in each industry group (using the Global Industry Classification Standard: GICS)
are identified. Benchmark SVT levels for each industry are established based on
these top performers’ historic SVT. Regression analyses are run on each industry
group to identify the variables most strongly correlated to SVT. The benchmark
industry SVT level is then adjusted upwards or downwards for the specific
company by plugging the company-specific performance measures, size, and cash
compensation into the industry cap equations to arrive at the company’s
benchmark.22
Three-Year Value-Adjusted Burn Rate
A
“Value-Adjusted Burn Rate” is used for stock plan evaluations. Value-Adjusted
Burn Rate benchmarks are calculated as the greater of: (1) an
industry-specific threshold based on three-year burn rates within the company’s
GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500)
and non-Russell 3000 index; and
(2) a de minimis threshold established separately for each of the
S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year
burn-rate benchmark changes will be limited to a predetermined range above or
below the prior year’s burn-rate benchmark.
The
Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted
Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model)
+ (# of full-value awards * stock price)) / (Weighted average common shares *
stock price).
Egregious Factors
Liberal Change in Control Definition
Generally
vote against equity plans if the plan has a liberal definition of change in
control and the equity awards could vest upon such liberal definition of change
in control, even though an actual change in control may not occur. Examples of
such a definition include, but are not limited to, announcement or commencement
of a tender offer, provisions for acceleration upon a “potential” takeover,
shareholder approval of a merger or other transactions, or similar language.
22 For plans evaluated
under the Equity Plan Scorecard policy, the company’s SVT benchmark is
considered along with other factors.
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Repricing Provisions
Vote
against plans that expressly permit the repricing or exchange of underwater
stock options/stock appreciate rights (SARs) without prior shareholder approval.
“Repricing” typically includes the ability to do any of the following:
| |
◾ |
|
Amend the terms of outstanding options or SARs to reduce the
exercise price of such outstanding options or SARs;
|
| |
◾ |
|
Cancel outstanding options or SARs in exchange for options or
SARs with an exercise price that is less than the exercise price of the
original options or SARs; |
| |
◾ |
|
Cancel underwater options in exchange for stock awards; or
|
| |
◾ |
|
Provide cash buyouts of underwater options.
|
While
the above cover most types of repricing, ISS may view other provisions as akin
to repricing depending on the facts and circumstances.
Also,
vote against or withhold from members of the Compensation Committee who approved
repricing (as defined above or otherwise determined by ISS), without prior
shareholder approval, even if such repricings are allowed in their equity plan.
Vote
against plans that do not expressly prohibit repricing or cash buyout of
underwater options without shareholder approval if the company has a history of
repricing/buyouts without shareholder approval, and the applicable listing
standards would not preclude them from doing so.
Problematic Pay Practices or
Significant Pay-for-Performance Disconnect
If
the equity plan on the ballot is a vehicle for problematic pay
practices, vote against the plan.
ISS
may recommend a vote against the equity plan if the plan is determined to be a
vehicle for pay-for-performance misalignment.
Considerations in voting against the equity plan may include, but are not
limited to:
| |
◾ |
|
Severity of the pay-for-performance
misalignment; |
| |
◾ |
|
Whether problematic equity grant practices are driving the
misalignment; and/or |
| |
◾ |
|
Whether equity plan awards have been heavily concentrated to
the CEO and/or the other NEOs. |
Amending Cash and Equity Plans
(including Approval for Tax Deductibility (162(m))
General
Recommendation: Vote case-by-case on amendments to cash and
equity incentive plans.
Generally
vote for proposals to amend executive cash, stock, or cash and stock incentive
plans if the proposal:
| |
◾ |
|
Addresses administrative features only; or
|
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the
plan administering committee consists entirely of independent directors,
per ISS’ Classification of Directors. Note that
if the company is presenting the plan to shareholders for the first time
for any reason (including after the company’s initial public offering), or
if the proposal is bundled with other material plan amendments, then the
recommendation will be case-by-case (see below).
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Vote
against proposals to amend executive cash, stock, or cash and stock incentive
plans if the proposal:
| |
◾ |
|
Seeks approval for Section 162(m) purposes only, and the
plan administering committee does not consist entirely of independent
directors, per ISS’ Classification of
Directors. |
Vote
case-by-case on all other proposals to
amend cash incentive plans. This includes plans presented to shareholders
for the first time after the company’s IPO and/or proposals that bundle material
amendment(s) other than those for Section 162(m) purposes.
Vote
case-by-case on all other proposals to
amend equity incentive plans, considering the following:
| |
◾ |
|
If the proposal requests additional shares and/or the
amendments include a term extension or addition of full value awards as an
award type, the recommendation will be based on the Equity Plan Scorecard
evaluation as well as an analysis of the overall impact of the amendments.
|
| |
◾ |
|
If the plan is being presented to shareholders for the first
time (including after the company’s IPO), whether or not additional shares
are being requested, the recommendation will be based on the Equity Plan
Scorecard evaluation as well as an analysis of the overall impact of any
amendments. |
| |
◾ |
|
If there is no request for additional shares and the amendments
do not include a term extension or addition of full value awards as an
award type, then the recommendation will be based entirely on an analysis
of the overall impact of the amendments, and the EPSC evaluation will be
shown only for informational purposes. |
In
the first two case-by-case evaluation scenarios, the
EPSC evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award
Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options
that have Dividend Equivalent Rights (DERs) associated with them will have a
higher calculated award value than those without DERs under the binomial model,
based on the value of these dividend streams. The higher value will be applied
to new shares, shares available under existing plans, and shares awarded but not
exercised per the plan specifications. DERS transfer more shareholder equity to
employees and non-employee directors
and this cost should be captured.
Operating Partnership (OP) Units in
Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For
Real Estate Investment Trusts (REITS), include the common shares issuable upon
conversion of outstanding Operating Partnership (OP) units in the share count
for the purposes of determining: (1) market capitalization in the
Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the
burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General
Recommendation: Vote for proposals
to implement a 401(k) savings plan for employees.
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Employee Stock Ownership Plans
(ESOPs)
General
Recommendation: Vote for proposals
to implement an ESOP or increase authorized shares for existing ESOPs, unless
the number of shares allocated to the ESOP is excessive (more than five percent
of outstanding shares).
Employee Stock Purchase
Plans—Qualified Plans
General
Recommendation: Vote case-by-case on qualified employee
stock purchase plans. Vote for employee stock purchase plans where all of the
following apply:
| |
◾ |
|
Purchase price is at least 85 percent of fair market
value; |
| |
◾ |
|
Offering period is 27 months or less; and
|
| |
◾ |
|
The number of shares allocated to the plan is 10 percent
or less of the outstanding shares. |
Vote
against qualified employee stock purchase plans where when the plan features do
not meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: Vote case-by-case on nonqualified employee
stock purchase plans. Vote for nonqualified employee stock purchase plans with
all the following features:
| |
◾ |
|
Broad-based participation; |
| |
◾ |
|
Limits on employee contribution, which may be a fixed dollar
amount or expressed as a percent of base salary; |
| |
◾ |
|
Company matching contribution up to 25 percent of
employee’s contribution, which is effectively a discount of
20 percent from market value; and |
| |
◾ |
|
No discount on the stock price on the date of purchase when
there is a company matching contribution. |
Vote
against nonqualified employee stock purchase plans when the plan features do not
meet all of the above criteria. If the matching contribution or effective
discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of
the assessment.
Option Exchange Programs/Repricing
Options
General
Recommendation: Vote case-by-case on management proposals
seeking approval to exchange/reprice options taking into consideration:
| |
◾ |
|
Historic trading patterns—the stock price should not be so
volatile that the options are likely to be back “in-the-money” over the near
term; |
| |
◾ |
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Rationale for the re-pricing—was the stock price decline
beyond management’s control?; |
| |
◾ |
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Is this a value-for-value exchange?;
|
| |
◾ |
|
Are surrendered stock options added back to the plan reserve?;
|
| |
◾ |
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Timing—repricing should occur at least one year out from any
precipitous drop in company’s stock price; |
| |
◾ |
|
Option vesting—does the new option vest immediately or is there
a black-out period?;
|
| |
◾ |
|
Term of the option—the term should remain the same as that of
the replaced option; |
| |
◾ |
|
Exercise price—should be set at fair market or a premium to
market; |
| |
◾ |
|
Participants—executive officers and directors must be excluded.
|
If
the surrendered options are added back to the equity plans for re-issuance, then also take into
consideration the company’s total cost of equity plans and its three-year
average burn rate.
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C-54 |
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54 of 81 |
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In
addition to the above considerations, evaluate the intent, rationale, and timing
of the repricing proposal. The proposal should clearly articulate why the board
is choosing to conduct an exchange program at this point in time. Repricing
underwater options after a recent precipitous drop in the company’s stock price
demonstrates poor timing and warrants additional scrutiny. Also, consider the
terms of the surrendered options, such as the grant date, exercise price and
vesting schedule. Grant dates of surrendered options should be far enough back
(two to three years) so as not to suggest that repricings are being done to take
advantage of short-term downward price movements. Similarly, the exercise price
of surrendered options should be above the 52-week high for the stock price.
Vote
for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General
Recommendation: Vote case-by-case on plans that provide
participants with the option of taking all or a portion of their cash
compensation in the form of stock.
Vote
for non-employee director-only equity
plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote
case-by-case on plans which do not
provide a dollar-for-dollar cash for stock
exchange. In cases where the exchange is not dollar-for-dollar, the request for new
or additional shares for such equity program will be considered using the
binomial option pricing model. In an effort to capture the total cost of total
compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
General
Recommendation: One-time Transfers: Vote against or withhold
from compensation committee members if they fail to submit one-time transfers to shareholders for
approval.
Vote
case-by-case on one-time transfers. Vote for if:
| |
◾ |
|
Executive officers and non-employee directors are excluded
from participating; |
| |
◾ |
|
Stock options are purchased by third-party financial
institutions at a discount to their fair value using option pricing models
such as Black-Scholes or a Binomial Option Valuation or other appropriate
financial models; and |
| |
◾ |
|
There is a two-year
minimum holding period for sale proceeds (cash or stock) for all
participants. |
Additionally,
management should provide a clear explanation of why options are being
transferred to a third-party institution and whether the events leading up to a
decline in stock price were beyond management’s control. A review of the
company’s historic stock price volatility should indicate if the options are
likely to be back “in-the-money” over the near term.
Ongoing
TSO program: Vote against equity plan proposals if the details of ongoing TSO
programs are not provided to shareholders. Since TSOs will be one of the award
types under a stock plan, the ongoing TSO program, structure, and mechanics must
be disclosed to shareholders. The specific criteria to be considered in
evaluating these proposals include, but not limited, to the following:
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Cost of the program and impact of the TSOs on company’s total
option expense; and |
| |
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|
Option repricing policy. |
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C-55 |
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55 of 81 |
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Amendments
to existing plans that allow for introduction of transferability of stock
options should make clear that only options granted post-amendment shall be
transferable.
Director Compensation
Shareholder Ratification of Director
Pay Programs
General
Recommendation: Vote case-by-case on management proposals
seeking ratification of non-employee
director compensation, based on the following factors:
| |
◾ |
|
If the equity plan under which non-employee director grants are made
is on the ballot, whether or not it warrants support; and
|
| |
◾ |
|
An assessment of the following qualitative factors:
|
| |
◾ |
|
The relative magnitude of director compensation as compared to
companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director
compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements;
|
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation;
|
| |
◾ |
|
Meaningful limits on director compensation;
|
| |
◾ |
|
The availability of retirement benefits or perquisites; and
|
| |
◾ |
|
The quality of disclosure surrounding director compensation.
|
Equity Plans for Non-Employee Directors
General
Recommendation: Vote case-by-case on compensation plans for
non-employee directors, based on:
| |
◾ |
|
The total estimated cost of the company’s equity plans relative
to industry/market cap peers, measured by the company’s estimated
Shareholder Value Transfer (SVT) based on new shares requested plus shares
remaining for future grants, plus outstanding unvested/unexercised grants;
|
| |
◾ |
|
The company’s three-year burn rate relative to its
industry/market cap peers (in certain circumstances); and
|
| |
◾ |
|
The presence of any egregious plan features (such as an option
repricing provision or liberal CIC vesting risk). |
On
occasion, non-employee director stock
plans will exceed the plan cost or burn-rate benchmarks when combined with
employee or executive stock plans. In such cases, vote case-by-case on the plan taking into
consideration the following qualitative factors:
| |
◾ |
|
The relative magnitude of director compensation as compared to
companies of a similar profile; |
| |
◾ |
|
The presence of problematic pay practices relating to director
compensation; |
| |
◾ |
|
Director stock ownership guidelines and holding requirements;
|
| |
◾ |
|
Equity award vesting schedules; |
| |
◾ |
|
The mix of cash and equity-based compensation;
|
| |
◾ |
|
Meaningful limits on director compensation;
|
| |
◾ |
|
The availability of retirement benefits or perquisites; and
|
| |
◾ |
|
The quality of disclosure surrounding director compensation.
|
Non-Employee Director Retirement Plans
General Recommendation: Vote
against retirement plans for non-employee directors. Vote for shareholder
proposals to eliminate retirement plans for non-employee directors.
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C-56 |
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56 of 81 |
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Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote
case-by-case on proposals seeking
deferral of a portion of annual bonus pay, with ultimate payout linked to
sustained results for the performance metrics on which the bonus was earned
(whether for the named executive officers or a wider group of employees), taking
into account the following factors:
| |
◾ |
|
The company’s past practices regarding equity and cash
compensation; |
| |
◾ |
|
Whether the company has a holding period or stock ownership
requirements in place, such as a meaningful retention ratio (at least
50 percent for full tenure); and |
| |
◾ |
|
Whether the company has a rigorous claw-back policy in place.
|
Compensation Consultants—Disclosure
of Board or Company’s Utilization
General Recommendation:
Generally vote for shareholder proposals seeking disclosure regarding the
company, board, or compensation committee’s use of compensation consultants,
such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of
Compensation for Executives and Directors
General Recommendation:
Generally 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.
Generally
vote against shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation (such as
types of compensation elements or specific metrics) to be used for executive or
directors.
Generally
vote against shareholder proposals that mandate a minimum amount of stock that
directors must own in order to qualify as a director or to remain on the board.
Vote
case-by-case on all other shareholder
proposals regarding executive and director pay, taking into account relevant
factors, including but not limited to: company performance, pay level and design
versus peers, history of compensation concerns or pay-for-performance disconnect, and/or
the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death
Benefits
General Recommendation:
Generally vote for proposals calling for companies to adopt a policy of
obtaining shareholder approval for any future agreements and corporate policies
that could oblige the company to make payments or awards following the death of
a senior executive in the form of unearned salary or bonuses, accelerated
vesting or the continuation in force of unvested equity grants, perquisites and
other payments or awards made in lieu of compensation. This would not apply to
any benefit programs or equity plan proposals for which the broad-based employee
population is eligible.
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C-57 |
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57 of 81 |
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Hold Equity Past Retirement or for a
Significant Period of Time
General Recommendation: Vote
case-by-case on shareholder proposals
asking companies to adopt policies requiring senior executive officers to retain
a portion of net shares acquired through compensation plans. The following
factors will be taken into account:
| |
◾ |
|
The percentage/ratio of net shares required to be retained;
|
| |
◾ |
|
The time period required to retain the shares;
|
| |
◾ |
|
Whether the company has equity retention, holding period,
and/or stock ownership requirements in place and the robustness of such
requirements; |
| |
◾ |
|
Whether the company has any other policies aimed at mitigating
risk taking by executives; |
| |
◾ |
|
Executives’ actual stock ownership and the degree to which it
meets or exceeds the proponent’s suggested holding period/retention ratio
or the company’s existing requirements; and |
| |
◾ |
|
Problematic pay practices, current and past, which may
demonstrate a short-term versus long-term focus. |
Pay Disparity
General Recommendation: Vote
case-by-case on proposals calling for
an analysis of the pay disparity between corporate executives and other non-executive employees. The following
factors will be considered:
| |
◾ |
|
The company’s current level of disclosure of its executive
compensation setting process, including how the company considers pay
disparity; |
| |
◾ |
|
If any problematic pay practices or pay-for-performance concerns
have been identified at the company; and |
| |
◾ |
|
The level of shareholder support for the company’s pay
programs. |
Generally
vote against proposals calling for the company to use the pay disparity analysis
or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based
Awards
General Recommendation: Vote
case-by-case on shareholder proposals
requesting that a significant amount of future long-term incentive compensation
awarded to senior executives shall be performance-based and requesting that the
board adopt and disclose challenging performance metrics to shareholders, based
on the following analytical steps:
| |
◾ |
|
First, vote for shareholder proposals advocating the use of
performance-based equity awards, such as performance contingent options or
restricted stock, indexed options, or premium-priced options, unless the
proposal is overly restrictive or if the company has demonstrated that it
is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do
not meet the criteria to be considered as performance-based awards.
Further, premium-priced options should have a meaningful premium to be
considered performance-based awards. |
| |
◾ |
|
Second, assess the rigor of the company’s performance-based
equity program. If the bar set for the performance-based program is too
low based on the company’s historical or peer group comparison, generally
vote for the proposal. Furthermore, if target performance results in an
above target payout, vote for the shareholder proposal due to program’s
poor design. If the company does not disclose the performance metric of
the performance-based equity program, vote for the shareholder proposal
regardless of the outcome of the first step to the test.
|
In
general, vote for the shareholder proposal if the company does not meet both of
the above two steps.
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C-58 |
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58 of 81 |
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Pay for Superior Performance
General Recommendation: Vote
case-by-case on shareholder proposals
that request the board establish a pay-for-superior performance standard
in the company’s executive compensation plan for senior executives. These
proposals generally include the following principles:
| |
◾ |
|
Set compensation targets for the plan’s annual and long-term
incentive pay components at or below the peer group median;
|
| |
◾ |
|
Deliver a majority of the plan’s target long-term compensation
through performance-vested, not simply time-vested, equity awards;
|
| |
◾ |
|
Provide the strategic rationale and relative weightings of the
financial and non-financial
performance metrics or criteria used in the annual and performance-vested
long-term incentive components of the plan; |
| |
◾ |
|
Establish performance targets for each plan financial metric
relative to the performance of the company’s peer companies;
|
| |
◾ |
|
Limit payment under the annual and performance-vested long-term
incentive components of the plan to when the company’s performance on its
selected financial performance metrics exceeds peer group median
performance. |
Consider
the following factors in evaluating this proposal:
| |
◾ |
|
What aspects of the company’s annual and long-term equity
incentive programs are performance driven? |
| |
◾ |
|
If the annual and long-term equity incentive programs are
performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer
group? |
| |
◾ |
|
Can shareholders assess the correlation between pay and
performance based on the current disclosure? |
| |
◾ |
|
What type of industry and stage of business cycle does the
company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation:
Generally vote for shareholder proposals calling for the addition of certain
safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may
include:
| |
◾ |
|
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form
8-K; |
| |
◾ |
|
Amendment or early termination of a 10b5-1 Plan allowed only under
extraordinary circumstances, as determined by the board;
|
| |
◾ |
|
Request that a certain number of days that must elapse between
adoption or amendment of a 10b5-1
Plan and initial trading under the plan; |
| |
◾ |
|
Reports on Form 4 must identify transactions made pursuant to a
10b5-1 Plan;
|
| |
◾ |
|
An executive may not trade in company stock outside the 10b5-1 Plan; |
| |
◾ |
|
Trades under a 10b5-1
Plan must be handled by a broker who does not handle other securities
transactions for the executive. |
Prohibit Outside CEOs from Serving on
Compensation Committees
General Recommendation:
Generally vote against proposals seeking a policy to prohibit any outside CEO
from serving on a company’s compensation committee, unless the company has
demonstrated problematic pay practices that raise concerns about the performance
and composition of the committee.
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C-59 |
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59 of 81 |
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Recoupment of Incentive or Stock
Compensation in Specified Circumstances
General Recommendation: Vote
case-by-case on proposals to recoup
incentive cash or stock compensation made to senior executives if it is later
determined that the figures upon which incentive compensation is earned turn out
to have been in error, or if the senior executive has breached company policy or
has engaged in misconduct that may be significantly detrimental to the company’s
financial position or reputation, or if the senior executive failed to manage or
monitor risks that subsequently led to significant financial or reputational
harm to the company. Many companies have adopted policies that permit recoupment
in cases where an executive’s fraud, misconduct, or negligence significantly
contributed to a restatement of financial results that led to the awarding of
unearned incentive compensation. However, such policies may be narrow given that
not all misconduct or negligence may result in significant financial
restatements. Misconduct, negligence, or lack of sufficient oversight by senior
executives may lead to significant financial loss or reputational damage that
may have long-lasting impact.
In
considering whether to support such shareholder proposals, ISS will take into
consideration the following factors:
| |
◾ |
|
If the company has adopted a formal recoupment policy;
|
| |
◾ |
|
The rigor of the recoupment policy focusing on how and under
what circumstances the company may recoup incentive or stock compensation;
|
| |
◾ |
|
Whether the company has chronic restatement history or material
financial problems; |
| |
◾ |
|
Whether the company’s policy substantially addresses the
concerns raised by the proponent; |
| |
◾ |
|
Disclosure of recoupment of incentive or stock compensation
from senior executives or lack thereof; or |
| |
◾ |
|
Any other relevant factors. |
Severance Agreements for
Executives/Golden Parachutes
General Recommendation: Vote
for shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote
case-by-case on proposals to ratify or
cancel golden parachutes. An acceptable parachute should include, but is not
limited to, the following:
| |
◾ |
|
The triggering mechanism should be beyond the control of
management; |
| |
◾ |
|
The amount should not exceed three times base amount (defined
as the average annual taxable W-2
compensation during the five years prior to the year in which the change
of control occurs); |
| |
◾ |
|
Change-in-control payments
should be double-triggered, i.e., (1) after a change in control has taken
place, and (2) termination of the executive as a result of the change
in control. Change in control is defined as a change in the company
ownership structure. |
Share Buyback Impact on Incentive
Program Metrics
General Recommendation: Vote
case-by-case on proposals requesting
the company exclude the impact of share buybacks from the calculation of
incentive program metrics, considering the following factors:
| |
◾ |
|
The frequency and timing of the company’s share buybacks;
|
| |
◾ |
|
The use of per-share
metrics in incentive plans; |
| |
◾ |
|
The effect of recent buybacks on incentive metric results and
payouts; and |
| |
◾ |
|
Whether there is any indication of metric result manipulation.
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C-60 |
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60 of 81 |
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Supplemental Executive Retirement
Plans (SERPs)
General Recommendation:
Generally vote for shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company’s
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
Generally
vote for shareholder proposals requesting to limit the executive benefits
provided under the company’s supplemental executive retirement plan (SERP) by
limiting covered compensation to a senior executive’s annual salary or those pay
elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation:
Generally vote for proposals calling for companies to adopt a policy of not
providing tax gross-up payments to
executives, except in situations where gross-ups are provided pursuant to a plan,
policy, or arrangement applicable to management employees of the company, such
as a relocation or expatriate tax equalization policy.
Termination of Employment Prior to
Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote
case-by-case on shareholder proposals
seeking a policy requiring termination of employment prior to severance payment
and/or eliminating accelerated vesting of unvested equity.
The
following factors will be considered:
| |
◾ |
|
The company’s current treatment of equity upon employment
termination and/or in change-in-control situations
(i.e., vesting is double triggered and/or pro rata, does it allow for the
assumption of equity by acquiring company, the treatment of performance
shares, etc.); |
| |
◾ |
|
Current employment agreements, including potential poor pay
practices such as gross-ups
embedded in those agreements. |
Generally
vote for proposals seeking a policy that prohibits automatic acceleration of the
vesting of equity awards to senior executives upon a voluntary termination of
employment or in the event of a change in control (except for pro rata vesting
considering the time elapsed and attainment of any related performance goals
between the award date and the change in control).
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C-61 |
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61 of 81 |
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6. Routine/Miscellaneous
Adjourn Meeting
General
Recommendation: Generally vote
against proposals to provide management with the authority to adjourn an annual
or special meeting absent compelling reasons to support the proposal.
Vote
for proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote against proposals if
the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
General
Recommendation: Vote case-by-case on proposals to reduce
quorum requirements for shareholder meetings below a majority of the shares
outstanding, taking into consideration:
| |
◾ |
|
The new quorum threshold requested; |
| |
◾ |
|
The rationale presented for the reduction;
|
| |
◾ |
|
The market capitalization of the company (size, inclusion in
indices); |
| |
◾ |
|
The company’s ownership structure; |
| |
◾ |
|
Previous voter turnout or attempts to achieve quorum;
|
| |
◾ |
|
Any provisions or commitments to restore quorum to a majority
of shares outstanding, should voter turnout improve sufficiently; and
|
| |
◾ |
|
Other factors as appropriate. |
In
general, a quorum threshold kept as close to a majority of shares outstanding as
is achievable is preferred.
Vote
case-by-case on directors who
unilaterally lower the quorum requirements below a majority of the shares
outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
General
Recommendation: Vote for bylaw or
charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
General
Recommendation: Vote for proposals
to change the corporate name unless there is compelling evidence that the change
would adversely impact shareholder value.
Change Date, Time, or Location of
Annual Meeting
General
Recommendation: Vote for management
proposals to change the date, time, or location of the annual meeting unless the
proposed change is unreasonable.
Vote
against shareholder proposals to change the date, time, or location of the
annual meeting unless the current scheduling or location is unreasonable.
Other Business
General
Recommendation: Vote against
proposals to approve other business when it appears as a voting item.
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C-62 |
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62 of 81 |
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7. Social and Environmental Issues
Global Approach – E&S Shareholder
Proposals
ISS
applies a common approach globally to evaluating social and environmental
proposals which cover a wide range of topics, including consumer and product
safety, environment and energy, labor standards and human rights, workplace and
board diversity, and corporate political issues. While a variety of factors goes
into each analysis, the overall principle guiding all vote recommendations
focuses on how the proposal may enhance or protect shareholder value in either
the short or long term.
General
Recommendation: Generally vote case-by-case, examining primarily
whether implementation of the proposal is likely to enhance or protect
shareholder value. The following factors will be considered:
| |
◾ |
|
If the issues presented in the proposal are being appropriately
or effectively dealt with through legislation or government regulation;
|
| |
◾ |
|
If the company has already responded in an appropriate and
sufficient manner to the issue(s) raised in the proposal;
|
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or
timeframe) or overly prescriptive; |
| |
◾ |
|
The company’s approach compared with any industry standard
practices for addressing the issue(s) raised by the proposal;
|
| |
◾ |
|
Whether there are significant controversies, fines, penalties,
or litigation associated with the company’s practices related to the
issue(s) raised in the proposal; |
| |
◾ |
|
If the proposal requests increased disclosure or greater
transparency, whether reasonable and sufficient information is currently
available to shareholders from the company or from other publicly
available sources; and |
| |
◾ |
|
If the proposal requests increased disclosure or greater
transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive
disadvantage. |
Endorsement of Principles
General
Recommendation: Generally vote
against proposals seeking a company’s endorsement of principles that support a
particular public policy position. Endorsing a set of principles may require a
company to take a stand on an issue that is beyond its own control and may limit
its flexibility with respect to future developments.
Management
and the board should be afforded the flexibility to make decisions on specific
public policy positions based on their own assessment of the most beneficial
strategies for the company.
Animal Welfare
Animal Welfare Policies
General
Recommendation: Generally vote for
proposals seeking a report on a company’s animal welfare standards, or animal
welfare-related risks, unless:
| |
◾ |
|
The company has already published a set of animal welfare
standards and monitors compliance; |
| |
◾ |
|
The company’s standards are comparable to industry peers; and
|
| |
◾ |
|
There are no recent significant fines, litigation, or
controversies related to the company’s and/or its suppliers’ treatment of
animals. |
|
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C-63 |
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63 of 81 |
|
Animal Testing
General
Recommendation: Generally vote
against proposals to phase out the use of animals in product testing, unless:
| |
◾ |
|
The company is conducting animal testing programs that are
unnecessary or not required by regulation; |
| |
◾ |
|
The company is conducting animal testing when suitable
alternatives are commonly accepted and used by industry peers; or
|
| |
◾ |
|
There are recent, significant fines or litigation related to
the company’s treatment of animals. |
Animal Slaughter
General
Recommendation: Generally vote
against proposals requesting the implementation of Controlled Atmosphere Killing
(CAK) methods at company and/or supplier operations unless such methods are
required by legislation or generally accepted as the industry standard.
Vote
case-by-case on proposals requesting a
report on the feasibility of implementing CAK methods at company and/or supplier
operations considering the availability of existing research conducted by the
company or industry groups on this topic and any fines or litigation related to
current animal processing procedures at the company.
Consumer Issues
Genetically Modified Ingredients
General
Recommendation: Generally vote
against proposals requesting that a company voluntarily label genetically
engineered (GE) ingredients in its products. The labeling of products with GE
ingredients is best left to the appropriate regulatory authorities.
Vote
case-by-case on proposals asking for a
report on the feasibility of labeling products containing GE ingredients, taking
into account:
| |
◾ |
|
The potential impact of such labeling on the company’s
business; |
| |
◾ |
|
The quality of the company’s disclosure on GE product labeling,
related voluntary initiatives, and how this disclosure compares with
industry peer disclosure; and |
| |
◾ |
|
Company’s current disclosure on the feasibility of GE product
labeling. |
Generally
vote against proposals seeking a report on the social, health, and environmental
effects of genetically modified organisms (GMOs). Studies of this sort are
better undertaken by regulators and the scientific community.
Generally
vote against proposals to eliminate GE ingredients from the company’s products,
or proposals asking for reports outlining the steps necessary to eliminate GE
ingredients from the company’s products. Such decisions are more appropriately
made by management with consideration of current regulations.
Reports on Potentially Controversial
Business/Financial Practices
General
Recommendation: Vote case-by-case on requests for reports
on a company’s potentially controversial business or financial practices or
products, taking into account:
| |
◾ |
|
Whether the company has adequately disclosed mechanisms in
place to prevent abuses; |
|
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C-64 |
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64 of 81 |
|
| |
◾ |
|
Whether the company has adequately disclosed the financial
risks of the products/practices in question; |
| |
◾ |
|
Whether the company has been subject to violations of related
laws or serious controversies; and |
| |
◾ |
|
Peer companies’ policies/practices in this area.
|
Pharmaceutical Pricing, Access to
Medicines, and Prescription Drug Reimportation
General
Recommendation: Generally vote
against proposals requesting that companies implement specific price restraints
on pharmaceutical products unless the company fails to adhere to legislative
guidelines or industry norms in its product pricing practices.
Vote
case-by-case on proposals requesting
that a company report on its product pricing or access to medicine policies,
considering:
| |
◾ |
|
The potential for reputational, market, and regulatory risk
exposure; |
| |
◾ |
|
Existing disclosure of relevant policies;
|
| |
◾ |
|
Deviation from established industry norms;
|
| |
◾ |
|
Relevant company initiatives to provide research and/or
products to disadvantaged consumers; |
| |
◾ |
|
Whether the proposal focuses on specific products or geographic
regions; |
| |
◾ |
|
The potential burden and scope of the requested report;
|
| |
◾ |
|
Recent significant controversies, litigation, or fines at the
company. |
Generally
vote for proposals requesting that a company report on the financial and legal
impact of its prescription drug reimportation policies unless such information
is already publicly disclosed.
Generally
vote against proposals requesting that companies adopt specific policies to
encourage or constrain prescription drug reimportation. Such matters are more
appropriately the province of legislative activity and may place the company at
a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous
Materials
General
Recommendation: Generally vote for
proposals requesting that a company report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic/hazardous
materials or product safety in its supply chain, unless:
| |
◾ |
|
The company already discloses similar information through
existing reports such as a supplier code of conduct and/or a
sustainability report; |
| |
◾ |
|
The company has formally committed to the implementation of a
toxic/hazardous materials and/or product safety and supply chain reporting
and monitoring program based on industry norms or similar standards within
a specified time frame; and |
| |
◾ |
|
The company has not been recently involved in relevant
significant controversies, fines, or litigation. |
Vote
case-by-case on resolutions requesting
that companies develop a feasibility assessment to phase-out of certain toxic/hazardous
materials, or evaluate and disclose the potential financial and legal risks
associated with utilizing certain materials, considering:
| |
◾ |
|
The company’s current level of disclosure regarding its product
safety policies, initiatives, and oversight mechanisms;
|
| |
◾ |
|
Current regulations in the markets in which the company
operates; and |
| |
◾ |
|
Recent significant controversies, litigation, or fines stemming
from toxic/hazardous materials at the company. |
|
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C-65 |
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65 of 81 |
|
Generally
vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General
Recommendation: Vote case-by-case on resolutions regarding
the advertisement of tobacco products, considering:
| |
◾ |
|
Recent related fines, controversies, or significant litigation;
|
| |
◾ |
|
Whether the company complies with relevant laws and regulations
on the marketing of tobacco; |
| |
◾ |
|
Whether the company’s advertising restrictions deviate from
those of industry peers; |
| |
◾ |
|
Whether the company entered into the Master Settlement
Agreement, which restricts marketing of tobacco to youth; and
|
| |
◾ |
|
Whether restrictions on marketing to youth extend to foreign
countries. |
Vote
case-by-case on proposals regarding
second-hand smoke, considering;
| |
◾ |
|
Whether the company complies with all laws and regulations;
|
| |
◾ |
|
The degree that voluntary restrictions beyond those mandated by
law might hurt the company’s competitiveness; and |
| |
◾ |
|
The risk of any health-related liabilities.
|
Generally
vote against resolutions to cease production of tobacco-related products, to
avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or
prohibit investment in tobacco equities. Such business decisions are better left
to company management or portfolio managers.
Generally
vote against proposals regarding tobacco product warnings. Such decisions are
better left to public health authorities.
Climate Change
Say on Climate (SoC) Management
Proposals
General
Recommendation: Vote case-by-case on management proposals
that request shareholders to approve the company’s climate transition action
plan23, taking
into account the completeness and rigor of the plan. Information that will be
considered where available includes the following:
| |
◾ |
|
The extent to which the company’s climate related disclosures
are in line with TCFD recommendations and meet other market standards;
|
| |
◾ |
|
Disclosure of its operational and supply chain GHG emissions
(Scopes 1, 2, and 3); |
| |
◾ |
|
The completeness and rigor of company’s short-, medium-, and
long-term targets for reducing operational and supply chain GHG emissions
(Scopes 1, 2, and 3 if relevant); |
| |
◾ |
|
Whether the company has sought and received third-party
approval that its targets are science-based; |
| |
◾ |
|
Whether the company has made a commitment to be “net zero” for
operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;
|
| |
◾ |
|
Whether the company discloses a commitment to report on the
implementation of its plan in subsequent years; |
| |
◾ |
|
Whether the company’s climate data has received third-party
assurance; |
23 Variations of this
request also include climate transition related ambitions, or commitment to
reporting on the implementation of a climate plan.
|
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C-66 |
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66 of 81 |
|
| |
◾ |
|
Disclosure of how the company’s lobbying activities and its
capital expenditures align with company strategy; |
| |
◾ |
|
Whether there are specific industry decarbonization challenges;
and |
| |
◾ |
|
The company’s related commitment, disclosure, and performance
compared to its industry peers. |
Say on Climate (SoC) Shareholder
Proposals
General
Recommendation: Vote case-by-case on shareholder proposals
that request the company to disclose a report providing its GHG emissions levels
and reduction targets and/or its upcoming/approved climate transition action
plan and provide shareholders the opportunity to express approval or disapproval
of its GHG emissions reduction plan, taking into account information such as the
following:
| |
◾ |
|
The completeness and rigor of the company’s climate-related
disclosure; |
| |
◾ |
|
The company’s actual GHG emissions performance;
|
| |
◾ |
|
Whether the company has been the subject of recent, significant
violations, fines, litigation, or controversy related to its GHG
emissions; and |
| |
◾ |
|
Whether the proposal’s request is unduly burdensome (scope or
timeframe) or overly prescriptive. |
Climate Change/Greenhouse Gas (GHG)
Emissions
General
Recommendation: Generally vote for
resolutions requesting that a company disclose information on the financial,
physical, or regulatory risks it faces related to climate change on its
operations and investments or on how the company identifies, measures, and
manages such risks, considering:
| |
◾ |
|
Whether the company already provides current,
publicly-available information on the impact that climate change may have
on the company as well as associated company policies and procedures to
address related risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure compared to industry peers;
and |
| |
◾ |
|
Whether there are significant controversies, fines, penalties,
or litigation associated with the company’s climate change-related
performance. |
Generally
vote for proposals requesting a report on greenhouse gas (GHG) emissions from
company operations and/or products and operations, unless:
| |
◾ |
|
The company already discloses current, publicly-available
information on the impacts that GHG emissions may have on the company as
well as associated company policies and procedures to address related
risks and/or opportunities; |
| |
◾ |
|
The company’s level of disclosure is comparable to that of
industry peers; and |
| |
◾ |
|
There are no significant, controversies, fines, penalties, or
litigation associated with the company’s GHG emissions.
|
Vote
case-by-case on proposals that call
for the adoption of GHG reduction goals from products and operations, taking
into account:
| |
◾ |
|
Whether the company provides disclosure of year-over-year GHG
emissions performance data; |
| |
◾ |
|
Whether company disclosure lags behind industry peers;
|
| |
◾ |
|
The company’s actual GHG emissions performance;
|
| |
◾ |
|
The company’s current GHG emission policies, oversight
mechanisms, and related initiatives; and |
| |
◾ |
|
Whether the company has been the subject of recent, significant
violations, fines, litigation, or controversy related to GHG emissions.
|
|
|
|
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|
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C-67 |
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67 of 81 |
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Energy Efficiency
General
Recommendation: Generally vote for
proposals requesting that a company report on its energy efficiency policies,
unless:
| |
◾ |
|
The company complies with applicable energy efficiency
regulations and laws, and discloses its participation in energy efficiency
policies and programs, including disclosure of benchmark data, targets,
and performance measures; or |
| |
◾ |
|
The proponent requests adoption of specific energy efficiency
goals within specific timelines. |
Renewable Energy
General
Recommendation: Generally vote for
requests for reports on the feasibility of developing renewable energy resources
unless the report would be duplicative of existing disclosure or irrelevant to
the company’s line of business.
Generally
vote against proposals requesting that the company invest in renewable energy
resources. Such decisions are best left to management’s evaluation of the
feasibility and financial impact that such programs may have on the company.
Generally
vote against proposals that call for the adoption of renewable energy goals,
taking into account:
| |
◾ |
|
The scope and structure of the proposal;
|
| |
◾ |
|
The company’s current level of disclosure on renewable energy
use and GHG emissions; and |
| |
◾ |
|
The company’s disclosure of policies, practices, and oversight
implemented to manage GHG emissions and mitigate climate change risks.
|
Diversity
Board Diversity
General
Recommendation: Generally vote for
requests for reports on a company’s efforts to diversify the board, unless:
| |
◾ |
|
The gender and racial minority representation of the company’s
board is reasonably inclusive in relation to companies of similar size and
business; and |
| |
◾ |
|
The board already reports on its nominating procedures and
gender and racial minority initiatives on the board and within the
company. |
Vote
case-by-case on proposals asking a
company to increase the gender and racial minority representation on its board,
taking into account:
| |
◾ |
|
The degree of existing gender and racial minority diversity on
the company’s board and among its executive officers;
|
| |
◾ |
|
The level of gender and racial minority representation that
exists at the company’s industry peers; |
| |
◾ |
|
The company’s established process for addressing gender and
racial minority board representation; |
| |
◾ |
|
Whether the proposal includes an overly prescriptive request to
amend nominating committee charter language; |
|
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C-68 |
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|
68 of 81 |
|
| |
◾ |
|
The independence of the company’s nominating committee;
|
| |
◾ |
|
Whether the company uses an outside search firm to identify
potential director nominees; and |
| |
◾ |
|
Whether the company has had recent controversies, fines, or
litigation regarding equal employment practices. |
Equality of Opportunity
General
Recommendation: Generally vote for
proposals requesting a company disclose its diversity policies or initiatives,
or proposals requesting disclosure of a company’s comprehensive workforce
diversity data, including requests for EEO-1 data, unless:
| |
◾ |
|
The company publicly discloses equal opportunity policies and
initiatives in a comprehensive manner; |
| |
◾ |
|
The company already publicly discloses comprehensive workforce
diversity data; and |
| |
◾ |
|
The company has no recent significant EEO-related violations or litigation.
|
Generally
vote against proposals seeking information on the diversity efforts of suppliers
and service providers. Such requests may pose a significant burden on the
company.
Gender Identity, Sexual Orientation,
and Domestic Partner Benefits
General
Recommendation: Generally vote for
proposals seeking to amend a company’s EEO statement or diversity policies to
prohibit discrimination based on sexual orientation and/or gender identity,
unless the change would be unduly burdensome.
Generally
vote against proposals to extend company benefits to, or eliminate benefits
from, domestic partners. Decisions regarding benefits should be left to the
discretion of the company.
Gender, Race/Ethnicity Pay Gap
General
Recommendation: Vote case-by-case on requests for reports
on a company’s pay data by gender or race/ ethnicity, or a report on a company’s
policies and goals to reduce any gender or race/ethnicity pay gaps, taking into
account:
| |
◾ |
|
The company’s current policies and disclosure related to both
its diversity and inclusion policies and practices and its compensation
philosophy on fair and equitable compensation practices;
|
| |
◾ |
|
Whether the company has been the subject of recent controversy,
litigation, or regulatory actions related to gender, race, or ethnicity
pay gap issues; |
| |
◾ |
|
The company’s disclosure regarding gender, race, or ethnicity
pay gap policies or initiatives compared to its industry peers; and
|
| |
◾ |
|
Local laws regarding categorization of race and/or ethnicity
and definitions of ethnic and/or racial minorities.
|
Racial Equity and/or Civil Rights
Audit Guidelines
General
Recommendation: Vote case-by-case on proposals asking a
company to conduct an independent racial equity and/or civil rights audit,
taking into account:
| |
◾ |
|
The company’s established process or framework for addressing
racial inequity and discrimination internally; |
| |
◾ |
|
Whether the company adequately discloses workforce diversity
and inclusion metrics and goals; |
| |
◾ |
|
Whether the company has issued a public statement related to
its racial justice efforts in recent years, or has committed to internal
policy review; |
|
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C-69 |
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69 of 81 |
|
| |
◾ |
|
Whether the company has engaged with impacted communities,
stakeholders, and civil rights experts; |
| |
◾ |
|
The company’s track record in recent years of racial justice
measures and outreach externally; and |
| |
◾ |
|
Whether the company has been the subject of recent controversy,
litigation, or regulatory actions related to racial inequity or
discrimination. |
Environment and Sustainability
Facility and Workplace Safety
General
Recommendation: Vote case-by-case on requests for workplace
safety reports, including reports on accident risk reduction efforts, taking
into account:
| |
◾ |
|
The company’s current level of disclosure of its workplace
health and safety performance data, health and safety management policies,
initiatives, and oversight mechanisms; |
| |
◾ |
|
The nature of the company’s business, specifically regarding
company and employee exposure to health and safety risks;
|
| |
◾ |
|
Recent significant controversies, fines, or violations related
to workplace health and safety; and |
| |
◾ |
|
The company’s workplace health and safety performance relative
to industry peers. |
Vote
case-by-case on resolutions requesting
that a company report on safety and/or security risks associated with its
operations and/or facilities, considering:
| |
◾ |
|
The company’s compliance with applicable regulations and
guidelines; |
| |
◾ |
|
The company’s current level of disclosure regarding its
security and safety policies, procedures, and compliance monitoring; and
|
| |
◾ |
|
The existence of recent, significant violations, fines, or
controversy regarding the safety and security of the company’s operations
and/or facilities. |
General Environmental Proposals and
Community Impact Assessments
General
Recommendation: Vote case-by-case on requests for reports
on policies and/or the potential (community) social and/or environmental impact
of company operations, considering:
| |
◾ |
|
Current disclosure of applicable policies and risk assessment
report(s) and risk management procedures; |
| |
◾ |
|
The impact of regulatory non-compliance, litigation,
remediation, or reputational loss that may be associated with failure to
manage the company’s operations in question, including the management of
relevant community and stakeholder relations; |
| |
◾ |
|
The nature, purpose, and scope of the company’s operations in
the specific region(s); |
| |
◾ |
|
The degree to which company policies and procedures are
consistent with industry norms; and |
| |
◾ |
|
The scope of the resolution. |
Hydraulic Fracturing
General
Recommendation: Generally vote for
proposals requesting greater disclosure of a company’s (natural gas) hydraulic
fracturing operations, including measures the company has taken to manage and
mitigate the potential community and environmental impacts of those operations,
considering:
| |
◾ |
|
The company’s current level of disclosure of relevant policies
and oversight mechanisms; |
| |
◾ |
|
The company’s current level of such disclosure relative to its
industry peers; |
| |
◾ |
|
Potential relevant local, state, or national regulatory
developments; and |
|
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C-70 |
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70 of 81 |
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◾ |
|
Controversies, fines, or litigation related to the company’s
hydraulic fracturing operations. |
Operations in Protected Areas
General
Recommendation: Generally vote for
requests for reports on potential environmental damage as a result of company
operations in protected regions, unless:
| |
◾ |
|
Operations in the specified regions are not permitted by
current laws or regulations; |
| |
◾ |
|
The company does not currently have operations or plans to
develop operations in these protected regions; or |
| |
◾ |
|
The company’s disclosure of its operations and environmental
policies in these regions is comparable to industry peers.
|
Recycling
General
Recommendation: Vote case-by-case on proposals to report on
an existing recycling program, or adopt a new recycling program, taking into
account:
| |
◾ |
|
The nature of the company’s business; |
| |
◾ |
|
The current level of disclosure of the company’s existing
related programs; |
| |
◾ |
|
The timetable and methods of program implementation prescribed
by the proposal; |
| |
◾ |
|
The company’s ability to address the issues raised in the
proposal; and |
| |
◾ |
|
How the company’s recycling programs compare to similar
programs of its industry peers. |
Sustainability Reporting
General
Recommendation: Generally vote for
proposals requesting that a company report on its policies, initiatives, and
oversight mechanisms related to social, economic, and environmental
sustainability, unless:
| |
◾ |
|
The company already discloses similar information through
existing reports or policies such as an environment, health, and safety
(EHS) report; a comprehensive code of corporate conduct; and/or a
diversity report; or |
| |
◾ |
|
The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI) guidelines or
a similar standard within a specified time frame. |
Water Issues
General
Recommendation: Vote case-by-case on proposals requesting a
company report on, or adopt a new policy on, water-related risks and concerns,
taking into account:
| |
◾ |
|
The company’s current disclosure of relevant policies,
initiatives, oversight mechanisms, and water usage metrics;
|
| |
◾ |
|
Whether or not the company’s existing water-related policies
and practices are consistent with relevant internationally recognized
standards and national/local regulations; |
| |
◾ |
|
The potential financial impact or risk to the company
associated with water-related concerns or issues; and
|
| |
◾ |
|
Recent, significant company controversies, fines, or litigation
regarding water use by the company and its suppliers.
|
|
|
|
|
|
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C-71 |
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71 of 81 |
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General Corporate Issues
Charitable Contributions
General
Recommendation: Vote against
proposals restricting a company from making charitable contributions. Charitable
contributions are generally useful for assisting worthwhile causes and for
creating goodwill in the community. In the absence of bad faith, self-dealing,
or gross negligence, management should determine which, and if, contributions
are in the best interests of the company.
Data Security, Privacy, and Internet
Issues
General
Recommendation: Vote case-by-case on proposals requesting
the disclosure or implementation of data security, privacy, or information
access and management policies and procedures, considering:
| |
◾ |
|
The level of disclosure of company policies and procedures
relating to data security, privacy, freedom of speech, information access
and management, and Internet censorship; |
| |
◾ |
|
Engagement in dialogue with governments or relevant groups with
respect to data security, privacy, or the free flow of information on the
Internet; |
| |
◾ |
|
The scope of business involvement and of investment in
countries whose governments censor or monitor the Internet and other
telecommunications; |
| |
◾ |
|
Applicable market-specific laws or regulations that may be
imposed on the company; and |
| |
◾ |
|
Controversies, fines, or litigation related to data security,
privacy, freedom of speech, or Internet censorship.
|
ESG Compensation-Related Proposals
General
Recommendation: Vote case-by-case on proposals seeking a
report or additional disclosure on the company’s approach, policies, and
practices on incorporating environmental and social criteria into its executive
compensation strategy, considering:
| |
◾ |
|
The scope and prescriptive nature of the proposal;
|
| |
◾ |
|
The company’s current level of disclosure regarding its
environmental and social performance and governance;
|
| |
◾ |
|
The degree to which the board or compensation committee already
discloses information on whether it has considered related E&S
criteria; and |
| |
◾ |
|
Whether the company has significant controversies or regulatory
violations regarding social or environmental issues.
|
Human Rights, Human Capital Management,
and International Operations
Human Rights Proposals
General
Recommendation: Generally vote for
proposals requesting a report on company or company supplier labor and/or human
rights standards and policies unless such information is already publicly
disclosed.
Vote
case-by-case on proposals to implement
company or company supplier labor and/or human rights standards and policies,
considering:
| |
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The degree to which existing relevant policies and practices
are disclosed; |
| |
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Whether or not existing relevant policies are consistent with
internationally recognized standards; |
| |
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Whether company facilities and those of its suppliers are
monitored and how; |
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Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
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Scope and nature of business conducted in markets known to have
higher risk of workplace labor/human rights abuse;
|
| |
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Recent, significant company controversies, fines, or litigation
regarding human rights at the company or its suppliers;
|
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|
The scope of the request; and |
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Deviation from industry sector peer company standards and
practices. |
Vote
case-by-case on proposals requesting
that a company conduct an assessment of the human rights risks in its operations
or in its supply chain, or report on its human rights risk assessment process,
considering:
| |
◾ |
|
The degree to which existing relevant policies and practices
are disclosed, including information on the implementation of these
policies and any related oversight mechanisms; |
| |
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|
The company’s industry and whether the company or its suppliers
operate in countries or areas where there is a history of human rights
concerns; |
| |
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|
Recent significant controversies, fines, or litigation
regarding human rights involving the company or its suppliers, and whether
the company has taken remedial steps; and |
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Whether the proposal is unduly burdensome or overly
prescriptive. |
Mandatory Arbitration
General
Recommendation: Vote case-by-case on requests for a report
on a company’s use of mandatory arbitration on employment-related claims, taking
into account:
| |
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|
The company’s current policies and practices related to the use
of mandatory arbitration agreements on workplace claims;
|
| |
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|
Whether the company has been the subject of recent controversy,
litigation, or regulatory actions related to the use of mandatory
arbitration agreements on workplace claims; and |
| |
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|
The company’s disclosure of its policies and practices related
to the use of mandatory arbitration agreements compared to its peers.
|
Operations in High-Risk Markets
General
Recommendation: Vote case-by-case on requests for a report
on a company’s potential financial and reputational risks associated with
operations in “high-risk” markets, such as a terrorism-sponsoring state or
politically/socially unstable region, taking into account:
| |
◾ |
|
The nature, purpose, and scope of the operations and business
involved that could be affected by social or political disruption;
|
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|
Current disclosure of applicable risk assessment(s) and risk
management procedures; |
| |
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|
Compliance with U.S. sanctions and laws;
|
| |
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|
Consideration of other international policies, standards, and
laws; and |
| |
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|
Whether the company has been recently involved in recent,
significant controversies, fines, or litigation related to its operations
in “high-risk” markets. |
Outsourcing/Offshoring
General
Recommendation: Vote case-by-case on proposals calling for
companies to report on the risks associated with outsourcing/plant closures,
considering:
| |
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|
Controversies surrounding operations in the relevant market(s);
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The value of the requested report to shareholders;
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The company’s current level of disclosure of relevant
information on outsourcing and plant closure procedures; and
|
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|
The company’s existing human rights standards relative to
industry peers. |
Sexual Harassment
General
Recommendation: Vote case-by-case on requests for a report
on company actions taken to strengthen policies and oversight to prevent
workplace sexual harassment, or a report on risks posed by a company’s failure
to prevent workplace sexual harassment, taking into account:
| |
◾ |
|
The company’s current policies, practices, oversight mechanisms
related to preventing workplace sexual harassment;
|
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|
Whether the company has been the subject of recent controversy,
litigation, or regulatory actions related to workplace sexual harassment
issues; and |
| |
◾ |
|
The company’s disclosure regarding workplace sexual harassment
policies or initiatives compared to its industry peers.
|
Weapons and Military Sales
General
Recommendation: Vote against reports
on foreign military sales or offsets. Such disclosures may involve sensitive and
confidential information. Moreover, companies must comply with government
controls and reporting on foreign military sales.
Generally
vote against proposals asking a company to cease production or report on the
risks associated with the use of depleted uranium munitions or nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Such contracts are monitored by government agencies, serve multiple
military and non-military uses, and
withdrawal from these contracts could have a negative impact on the company’s
business.
Political Activities
Lobbying
General
Recommendation: Vote case-by-case on proposals requesting
information on a company’s lobbying (including direct, indirect, and grassroots
lobbying) activities, policies, or procedures, considering:
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The company’s current disclosure of relevant lobbying policies,
and management and board oversight; |
| |
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|
The company’s disclosure regarding trade associations or other
groups that it supports, or is a member of, that engage in lobbying
activities; and |
| |
◾ |
|
Recent significant controversies, fines, or litigation
regarding the company’s lobbying-related activities.
|
Political Contributions
General
Recommendation: Generally vote for
proposals requesting greater disclosure of a company’s political contributions
and trade association spending policies and activities, considering:
| |
◾ |
|
The company’s policies, and management and board oversight
related to its direct political contributions and payments to trade
associations or other groups that may be used for political purposes;
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The company’s disclosure regarding its support of, and
participation in, trade associations or other groups that may make
political contributions; and |
| |
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Recent significant controversies, fines, or litigation related
to the company’s political contributions or political activities.
|
Vote
against proposals barring a company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote
against proposals to publish in newspapers and other media a company’s political
contributions. Such publications could present significant cost to the company
without providing commensurate value to shareholders.
Political Expenditures and Lobbying
Congruency
General
Recommendation: Generally vote case-by-case on proposals requesting
greater disclosure of a company’s alignment of political contributions,
lobbying, and electioneering spending with a company’s publicly stated values
and policies, considering:
| |
◾ |
|
The company’s policies, management, board oversight, governance
processes, and level of disclosure related to direct political
contributions, lobbying activities, and payments to trade associations,
political action committees, or other groups that may be used for
political purposes; |
| |
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|
The company’s disclosure regarding: the reasons for its support
of candidates for public offices; the reasons for support of and
participation in trade associations or other groups that may make
political contributions; and other political activities;
|
| |
◾ |
|
Any incongruencies identified between a company’s direct and
indirect political expenditures and its publicly stated values and
priorities. |
| |
◾ |
|
Recent significant controversies related to the company’s
direct and indirect lobbying, political contributions, or political
activities. |
Generally
vote case-by-case on proposals requesting
comparison of a company’s political spending to objectives that can mitigate
material risks for the company, such as limiting global warming.
Political Ties
General
Recommendation: Generally vote
against proposals asking a company to affirm political nonpartisanship in the
workplace, so long as:
| |
◾ |
|
There are no recent, significant controversies, fines, or
litigation regarding the company’s political contributions or trade
association spending; and |
| |
◾ |
|
The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs) are
strictly voluntary and prohibit coercion. |
Vote
against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
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8. Mutual Fund Proxies
Election of Directors
General
Recommendation: Vote case-by-case on the election of
directors and trustees, following the same guidelines for uncontested directors
for public company shareholder meetings. However, mutual fund boards do not
usually have compensation committees, so do not withhold for the lack of this
committee.
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General
Recommendation: For closed-end management investment companies
(CEFs), vote against or withhold from nominating/governance committee members
(or other directors on a case-by-case basis) at CEFs that have
not provided a compelling rationale for opting-in to a Control Share Acquisition
statute, nor submitted a by-law
amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General
Recommendation: Vote case-by-case on conversion proposals,
considering the following factors:
| |
◾ |
|
Past performance as a closed-end fund;
|
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the discount; and
|
| |
◾ |
|
Past shareholder activism, board activity, and votes on related
proposals. |
Proxy Contests
General
Recommendation: Vote case-by-case on proxy contests,
considering the following factors:
| |
◾ |
|
Past performance relative to its peers;
|
| |
◾ |
|
Market in which the fund invests; |
| |
◾ |
|
Measures taken by the board to address the issues;
|
| |
◾ |
|
Past shareholder activism, board activity, and votes on related
proposals; |
| |
◾ |
|
Strategy of the incumbents versus the dissidents;
|
| |
◾ |
|
Independence of directors; |
| |
◾ |
|
Experience and skills of director candidates;
|
| |
◾ |
|
Governance profile of the company; |
| |
◾ |
|
Evidence of management entrenchment. |
Investment Advisory Agreements
General
Recommendation: Vote case-by-case on investment advisory
agreements, considering the following factors:
| |
◾ |
|
Proposed and current fee schedules; |
| |
◾ |
|
Fund category/investment objective; |
| |
◾ |
|
Performance benchmarks; |
| |
◾ |
|
Share price performance as compared with peers;
|
| |
◾ |
|
Resulting fees relative to peers; |
| |
◾ |
|
Assignments (where the advisor undergoes a change of control).
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Approving New Classes or Series of
Shares
General
Recommendation: Vote for the
establishment of new classes or series of shares.
Preferred Stock Proposals
General
Recommendation: Vote case-by-case on the authorization for
or increase in preferred shares, considering the following factors:
| |
◾ |
|
Stated specific financing purpose; |
| |
◾ |
|
Possible dilution for common shares; |
| |
◾ |
|
Whether the shares can be used for antitakeover purposes.
|
1940 Act Policies
General
Recommendation: Vote case-by-case on policies under the
Investment Advisor Act of 1940, considering the following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Regulatory developments; |
| |
◾ |
|
Current and potential returns; and |
| |
◾ |
|
Current and potential risk. |
Generally
vote for these amendments as long as the proposed changes do not fundamentally
alter the investment focus of the fund and do comply with the current SEC
interpretation.
Changing a Fundamental Restriction to
a Nonfundamental Restriction
General
Recommendation: Vote case-by-case on proposals to change a
fundamental restriction to a non-fundamental restriction, considering the
following factors:
| |
◾ |
|
The fund’s target investments; |
| |
◾ |
|
The reasons given by the fund for the change; and
|
| |
◾ |
|
The projected impact of the change on the portfolio.
|
Change Fundamental Investment
Objective to Nonfundamental
General
Recommendation: Vote against
proposals to change a fund’s fundamental investment objective to non-fundamental.
Name Change Proposals
General
Recommendation: Vote case-by-case on name change proposals,
considering the following factors:
| |
◾ |
|
Political/economic changes in the target market;
|
| |
◾ |
|
Consolidation in the target market; and
|
| |
◾ |
|
Current asset composition. |
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Change in Fund’s Subclassification
General
Recommendation: Vote case-by-case on changes in a fund’s
sub-classification, considering the
following factors:
| |
◾ |
|
Potential competitiveness; |
| |
◾ |
|
Current and potential returns; |
| |
◾ |
|
Consolidation in target industry. |
Business Development
Companies—Authorization to Sell Shares of Common Stock at a Price below Net
Asset Value
General
Recommendation: Vote for proposals
authorizing the board to issue shares below Net Asset Value (NAV) if:
| |
◾ |
|
The proposal to allow share issuances below NAV has an
expiration date no more than one year from the date shareholders approve
the underlying proposal, as required under the Investment Company Act of
1940; |
| |
◾ |
|
The sale is deemed to be in the best interests of shareholders
by (1) a majority of the company’s independent directors and
(2) a majority of the company’s directors who have no financial
interest in the issuance; and |
| |
◾ |
|
The company has demonstrated responsible past use of share
issuances by either: |
| |
◾ |
|
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
|
| |
◾ |
|
Providing disclosure that its past share issuances were priced
at levels that resulted in only small or moderate discounts to NAV and
economic dilution to existing non-participating shareholders.
|
Disposition of
Assets/Termination/Liquidation
General
Recommendation: Vote case-by-case on proposals to dispose
of assets, to terminate or liquidate, considering the following factors:
| |
◾ |
|
Strategies employed to salvage the company;
|
| |
◾ |
|
The fund’s past performance; |
| |
◾ |
|
The terms of the liquidation. |
Changes to the Charter Document
General
Recommendation: Vote case-by-case on changes to the charter
document, considering the following factors:
| |
◾ |
|
The degree of change implied by the proposal;
|
| |
◾ |
|
The efficiencies that could result; |
| |
◾ |
|
The state of incorporation; |
| |
◾ |
|
Regulatory standards and implications. |
Vote
against any of the following changes:
| |
◾ |
|
Removal of shareholder approval requirement to reorganize or
terminate the trust or any of its series; |
| |
◾ |
|
Removal of shareholder approval requirement for amendments to
the new declaration of trust; |
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Removal of shareholder approval requirement to amend the fund’s
management contract, allowing the contract to be modified by the
investment manager and the trust management, as permitted by the 1940 Act;
|
| |
◾ |
|
Allow the trustees to impose other fees in addition to sales
charges on investment in a fund, such as deferred sales charges and
redemption fees that may be imposed upon redemption of a fund’s shares;
|
| |
◾ |
|
Removal of shareholder approval requirement to engage in and
terminate subadvisory arrangements; |
| |
◾ |
|
Removal of shareholder approval requirement to change the
domicile of the fund. |
Changing the Domicile of a Fund
General
Recommendation: Vote case-by-case on re-incorporations, considering the following
factors:
| |
◾ |
|
Regulations of both states; |
| |
◾ |
|
Required fundamental policies of both states;
|
| |
◾ |
|
The increased flexibility available. |
Authorizing the Board to Hire and
Terminate Subadvisers Without Shareholder Approval
General
Recommendation: Vote against
proposals authorizing the board to hire or terminate subadvisers without
shareholder approval if the investment adviser currently employs only one
subadviser.
Distribution Agreements
General
Recommendation: Vote case-by-case on distribution agreement
proposals, considering the following factors:
| |
◾ |
|
Fees charged to comparably sized funds with similar objectives;
|
| |
◾ |
|
The proposed distributor’s reputation and past performance;
|
| |
◾ |
|
The competitiveness of the fund in the industry;
|
| |
◾ |
|
The terms of the agreement. |
Master-Feeder Structure
General
Recommendation: Vote for the
establishment of a master-feeder structure.
Mergers
General
Recommendation: Vote case-by-case on merger proposals,
considering the following factors:
| |
◾ |
|
Resulting fee structure; |
| |
◾ |
|
Performance of both funds; |
| |
◾ |
|
Continuity of management personnel; |
| |
◾ |
|
Changes in corporate governance and their impact on shareholder
rights. |
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Shareholder Proposals for Mutual Funds
Establish Director Ownership
Requirement
General
Recommendation: Generally vote
against shareholder proposals that mandate a specific minimum amount of stock
that directors must own in order to qualify as a director or to remain on the
board.
Reimburse Shareholder for Expenses
Incurred
General
Recommendation: Vote case-by-case on shareholder proposals
to reimburse proxy solicitation expenses. When supporting the dissidents, vote
for the reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
General
Recommendation: Vote case-by-case on proposals to terminate
the investment advisor, considering the following factors:
| |
◾ |
|
Performance of the fund’s Net Asset Value (NAV);
|
| |
◾ |
|
The fund’s history of shareholder relations;
|
| |
◾ |
|
The performance of other funds under the advisor’s management.
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We empower investors and companies to build
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G E T S T A R T E D W I T H I S S S O L U T I O N S
Email
[email protected] or visit www.issgovernance.com for more information.
Founded
in 1985, Institutional Shareholder Services group of companies (ISS) empowers
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providing high-quality data, analytics and insight. ISS, which is majority owned
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ISS’ objective and impartial offerings, as well as public companies focused on
ESG
and governance risk mitigation as a shareholder value enhancing measure. Clients
rely on ISS’ expertise to help them make informed investment decisions. This
document and all of the information contained in it, including without
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is the property of Institutional Shareholder Services Inc. (ISS), its
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The
Information has not been submitted to, nor received approval from, the United
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©
2022 | Institutional Shareholder Services and/or its affiliates
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