Corporate Governance:

The State Board of Administration (SBA) takes an active role in strengthening corporate governance. Effective corporate governance can enhance shareholder value and thereby play an important role in achieving our financial objectives as a long-term investor.

Integrity, performance, and accountability are principles that guide the SBA and our staff while serving as stewards of Florida's public pension and other trust funds. We expect nothing less from the companies and funds in which we invest. That's why the SBA supports the adoption of internationally recognized governance practices for well-managed public companies. These include independent boards, performance-based executive compensation, accurate accounting and audit practices, transparent board procedures, and policies covering issues such as succession planning and meaningful shareholder participation.

During fiscal year 2009, the SBA executed votes on 3,383 public company proxies covering approximately 30,000 individual voting items. On all proxy issues, the SBA voted for, against, or abstain on 71.3%, 28.5%, and 0.1% of all items, respectively. Of all votes cast, 31.1% were against the management recommended vote.

The Basics:

Corporate governance consists of the procedures and structures that investors, the suppliers of capital, rely on to assure a reasonable return on their investment. Corporate governance shapes the interactions between a company’s shareowners, board of directors, and management in an environment defined by the corporate charter, bylaws, formal policy, and rule of law. Unlike other corporate stakeholders such as employees and creditors, shareowners do not have contractual protections; instead, the board of directors is elected to act as an agent of the shareowners, monitoring management in shareowners’ interests.

Corporate governance is a multi-faceted subject. An important theme of corporate governance deals with issues of accountability and fiduciary duty, essentially advocating the implementation of guidelines and mechanisms to ensure good corporate behavior and protect shareowners. Another key focus is economic efficiency, through which the corporate governance system should aim to optimize economic results, with a strong emphasis on shareowners’ welfare. There are yet other sides to the corporate governance subject, such as the stakeholder view, which calls for more attention and accountability to players other than the shareowners.

Corporate Governance encompasses companies' activities in the following areas:

• Independence and expertise of candidates for the board of directors.
• Assuring the board has sufficient information to carry out its responsibility to monitor management.
• Mergers and acquisitions.
• Capitalization structure.
• Long-term business plans.
• Shareholders' rights.
• Executive Compensation.

Our Core Beliefs:

We believe a well-governed company is characterized by the following corporate governance structures, policies, and procedures:

• At least 75% of the board's directors are independent, meaning they have no relationship with the company other than the director position itself.
• Assuring the board has sufficient information to carry out its responsibility to monitor management.
• All board committees consist only of independent directors.
• There are annual reviews of senior management.
• The Chairman of the board is independent of management.
• All directors are elected by simple majority of voted shares on an annual basis, or by plurality in the event of a contested election.
• Individual shareowner votes are confidential from management, and there are fully disclosed vote tabulation policies.
• No anti-takeover devices such as supermajority voting thresholds, poison pills (a.k.a shareowner rights plans), etc. without shareowner approval.
• A simple majority of voted shares is required to amend a company's bylaws or charter.
• One share receives one vote (no dual class share structures with inequitable voting rights assigned to one share class).
• No bundling of proxy issues (for example, combining an unfavorable governance change with a favorable merger proposal) .
• Executive compensation is performance-based using leading pay-for-performance metrics, with all compensation plans subject to shareowner approval.
• "Repriced" or discounted stock options are prohibited.
• Full disclosure to shareowners of all assumptions used to value the awards of options or other compensation plan items.
• Directors and senior management own significant amounts of company stock, and the company has adopted detailed stock ownership guidelines.l
• The company's external auditor is annually ratified by shareowners.
• No tax or consulting services are procured from the firm auditing the company's financial statements.

What We Do:

We frequently attempt to influence and affect improvements in the corporate governance structures of individual companies. We achieve these objectives through a number of different, but integrated strategies.

Develop and implement proxy voting guidelines that improve the corporate governance structures of the companies we own. The proxy vote is a fundamental right tied to owning stock and creates a fiduciary responsibility upon pension plan managers to ensure proxies are voted in the best interest of fund participants and beneficiaries. A proxy vote, as part of a bundle of shareowner rights, has a value in the market. As the instrument by which a company's Board of Directors is elected, a share's voting rights can transfer control of the corporation from one party to another (generally known as the “control share premium”). Empirical studies have shown that approximately 4% to 5% of a share’s value may reflect this premium. Through the development and implementation of comprehensive corporate governance principles and proxy voting guidelines, the SBA assures that proxies are voted consistently. The SBA’s corporate governance principles and proxy voting guidelines address a wide range of issues, including auditor independence, board structure, director independence, as well as the types and levels of executive compensation.

Publish an annual report of the SBA's corporate governance activities. After the end of the proxy season, a comprehensive report is produced analyzing all of the SBA’s proxy votes on corporate governance resolutions including highlighted votes and significant capital markets events.

Provide full transparency of the SBA proxy voting guidelines and individual votes on our web site. We disclose information about specific proxy votes immediately after the proxy vote has been cast, and prior to annual or special shareowner meetings. We regularly express our views and positions by voting tens of thousands of individual ballot items each year.

Publicly support (or oppose) specific issues and provide regulatory and/or legislative commentary. When appropriate and in line with the SBA’s corporate governance principles, we may issue press releases, respond to media inquiries and/or support or oppose shareowner initiatives coordinated with other institutional investors. Since many new rules and regulatory proposals are released for public review, the SBA periodically submits formal comment to key regulatory oversight bodies such as the Securities and Exchange Commission (SEC), the stock exchanges (e.g., the New York Stock Exchange and Nasdaq Stock Market), the Financial Accounting Standards Board (FASB), U.S. Treasury Department, and the Public Company Accounting Oversight Board (PCAOB).

Engage individual company portfolio holdings on various corporate governance issues. Frequently, the SBA discusses proxy voting issues and general corporate governance topics directly with owned companies. For example, at times we may write letters to members of a board of directors to communicate our general or specific corporate governance concerns. Less frequently, we may seek opportunities to meet with individual directors or committees of the board to express similar views or submit shareowner proposals for approval on a company's proxy statement.

Coordinate active strategies with other large shareowners and shareowners groups. The SBA routinely interacts with other shareowners and groups of institutional investors on management quality and performance, executive compensation, board member independence and other significant governance topics. By being receptive to other investors, we stay abreast of issues involving specific companies and general corporate governance issues, including legal and regulatory changes.

• Council of Institutional Investors (CII) - We remain an active member in the CII, which serves as the leading proponent of shareowner issues affecting public pensions in the United States and has membership controlling over $3 trillion in assets.
• International Corporate Governance Network (ICGN) - Our membership in ICGN provides access to leading institutional investors concerned with corporate governance policy issues within the global capital markets. ICGN has membership controlling over $15 trillion in assets.

Pursue corporate governance reforms through securities litigation. The SBA may pursue corporate governance reforms within the scope of legal settlements of securities class action suits. The ability of institutional investors to get involved in securities class action litigation was enhanced by the Private Securities Litigation Reform Act (PSLRA), passed by Congress in 1995. The PSLRA made a number of significant changes to the securities class action litigation process, including requiring the lead plaintiff to be the person or group that either filed the complaint or has the largest financial interest in the case. In some cases, the SBA has served as lead plaintiff. The SBA has also “opted-out” of class action settlements and filed individual suits.

Who We Work With:

The SBA works with the following shareowner groups and research providers to implement its corporate governance program:

Council of Institutional Investors (CII) The SBA is a long-standing member of the Council. We work with CII in various capacities, including past and present service on the board and policy committees, participating in communications with the U.S. Securities and Exchange Commission on important shareowner issues, and engaging companies for governance reform.

International Corporate Governance Network  - The SBA is a member of this leading group of global instituitional investors concerned with international corporate governance issues. The SBA participates on its Cross-Border Voting Practices subcommittee.

Glass, Lewis & Co. -  Glass Lewis provides global proxy research and advice for approximately 13,000 companies. The SBA uses the Glass Lewis voting recommendations, in conjunction with our own policy guidelines to make proxy decisions.

Riskmetrics Group (RMG) -  RMG provides several services to the SBA including "Corporate Governance Quotient" company ratings, proxy recommendation research services, and voting analytics. The SBA uses RMG voting recommendations, in conjunction with our own policy guidelines to make proxy decisions.

PROXY Governance, Inc.(PGI) -  The SBA uses PROXY Governance voting recommendations, in conjunction with Glass Lewis, RiskMetrics Group (ISS), and our own policy guidelines to make proxy voting decisions. PROXY Governance conducts its analysis and provides recommendations on an “issue-by-company” basis. It views proxy issues in the context of company-specific metrics, taking into account various factors, such as an individual company’s financial performance relative to its industry, and the quality of its management and corporate governance, among other factors.

GovernanceMetrics International (GMI) -  GMI provides corporate governance research and ratings on more than 4,100 global companies using principles promulgated by the community of institutional investors and groups such as the Organization for Economic Co-operation and Development (OECD), the Commonwealth Association for Corporate Governance, the International Corporate Governance Network (ICGN), and the Business Roundtable.

Equilar -  Equilar provides director and executive compensation data for more than 4,000 companies. Equilar Insight reports include data covering cash compensation, long-term awards, present values of option grants, company financial performance, and employment agreements. Equilar's services are used by the SBA to monitor and research executive compensation levels.

The Corporate Library - The SBA subscribes to several services provided by The Corporate Library covering U.S. and international companies. The Corporate Library's Board Effectiveness Rating is intended to identify possible risk by highlighting potential areas of ineffective oversight by the board. The rating focuses on board actions rather than compliance with typical policies or structures and has an explicit component measuring executive compensation.

Conference Board Corporate Governance Center - Conference Board Corporate Governance Center brings together a distinguished group of senior corporate executives from leading world-class companies and influential institutional investors in a non-adversarial setting. In small groups, discussions enable a free-flowing exchange of ideas and effective networking. This highly unique forum allows industry leaders to debate, develop, and advance innovative governance practices, and to drive landmark research in corporate governance. Founded in 1993 and now a core division of The Conference Board, the Governance Center is committed to helping corporations enhance their governance processes, inspire market confidence, and facilitate capital formation in today's globally competitive marketplace.

Stanford Institutional Investors Forum  - In 2008, the SBA joined the Stanford Institutional Investors Forum in order to increase interaction and communication with other institutional investors. The Forum provides an opportunity for many of the nation’s largest and most sophisticated institutional investors to discuss current policy issues of concern to the institutional investor community. Meetings generally involve institutions that, in the aggregate, have in excess of $2 trillion in assets under management.