I-7 Review of Regents Proxy Voting Guidelines for University of California Investment Portfolios

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1 I-7 Review of Regents Guidelines for Investment Portfolios Committee on Investments/ Investment Advisory Group September 10, 2009

2 Background Guided by ERISA Sec 404(a)(1)(A) and (B) regarding proxy voting, the responsible fiduciary should consider only those factors that relate to the economic value of the plan s investment. The UC Policy is set by The Regents. The Policy (in place since December 1994) was last revised in November 2000 due to the following reasons: Potential conflict of interest matters. The increasing complexity and time-consuming nature of evaluating proxy issues. The inclusion of the Russell 3000 and MSCI EAFE Index Funds as a component of the Regents equity portfolios. May 6,

3 Process Policy Documents The Treasurer s Office, through State Street (SSGA) uses a third party organization, RiskMetrics (formerly ISS) to manage the voting process (including external managers portfolios). The service provides a written summary of all proxy votes on all equity assets on a regular basis. The documents used by RiskMetrics are: UC Regents Treasurer s Office Guidelines for (dated 10/14/2004). SSgA 2009 Policy (used for all issues not addressed by the Regent s document referenced above). May 6,

4 Process Voting Structure SSgA retains RiskMetrics Group, Inc. to assist in and facilitate the proxy voting process, including: Acting as voting agent (i.e. actually processing the proxies). Advising as to current and emerging governance issues that SSgA may wish to address. Interpreting this policy and applying it to individual proxy items. Providing analytical information concerning specific issuers and proxy items as well as governance trends and developments. RiskMetrics has developed internal codes for almost every type of voting issue. This includes environmental/social/governance (ESG) issues. SSgA has reviewed these codes and is in agreement with RiskMetrics interpretations of how these issues should be coded. In the cases where the Treasurer s Office Guidelines for are not specific the SSgA and RiskMetrics guidelines are used. May 6,

5 Process Voting Process As proxies are received by RiskMetrics, they are coded, the relevant policies are applied, and shares are voted in accordance with these policies. Proxy items that are newly encountered, not yet coded, or not covered by existing policies are passed by RiskMetrics to the SSgA Corporate Governance Team for evaluation. SSgA will review the issue and develop a position based on its policy and its fiduciary obligations. This position is communicated to RiskMetrics and the shares are voted in accordance with this position. Hence, each item is voted on a case by case basis. In developing its positions on any proxy voting issue, SSgA agrees entirely with the United States Department of Labor's position that "where proxy voting decisions may have an effect on the economic value of the plan's underlying investment, plan fiduciaries should make proxy voting decisions with a view to enhancing the value of the shares of stock" (PWBA Interpretative Bulletin 94-2). May 6,

6 Considerations when Implementing Changes to Policy The first question which needs to be answered, given the fiduciary duties under ERISA, is whether the benefit of any particular change to proxy voting policy outweighs the potential economic benefit or harm to the shareholders (in effect, the beneficiaries). SSgA has found no evidence of a significant correlation between ESG proposals brought by shareholders/activist groups and additional shareholder value. Increased fees to apply specific guidelines. Regents ownership of any one company is not large enough to control the outcome of voting. Any changes to the Policy would require full board approval. The Regents would have to be sensitive to establishing policies that would be consistent with the research mission of the University. For Full Policy and Guidelines see Appendix. May 6,