Corporate governance and proxy voting policy

Implementation and benefits

Introduction

This document is designed to set out the policy which directs our proxy voting; to deal with the implementation of the policy; and to outline the benefits which accrue to the Fund by the policy's application.

Principle

The rights of a shareholder to vote at company meetings is a fundamental link in the chain that binds the owners of the company to those who make the investment decision.

The exercise of that vote in an informed way lies at the heart of the regulation and promotion of good corporate governance. To this end, our Fund managers will be instructed to vote shares in UK companies in accordance with this policy. We retain a commitment to pragmatic and flexible voting and we would instruct our fund managers to contact us on any matters of corporate governance, which might be considered to be contentious.

Policy

Our policy is based on the principles of best practice of corporate governance as laid out in the Combined Code. As such, we will tend to vote in favour of company management except in cases judged to be in breach of the code or when we believe that companies are not acting in the best interests of shareholders. In these cases we will either abstain or vote against resolutions.

In order to avoid the simple box ticking which robs the proxy vote of much of its strength, we assess each resolution on a case by case basis and implement our policy in a flexible manner. We consider this to be especially important in the arena of smaller company voting where standards of proxy voting may be less developed than in larger UK companies.

This practical and pragmatic approach allows us to use our voting power to maximum effect.

Directors

Directors are the stewards of shareholders' capital and should be properly accountable for their actions. Sufficient information should be disclosed in the report and accounts to allow shareholders to judge the success of boards in leading and controlling their company.

We will normally vote against:

Combined roles of chairman and chief executive where not publicly justified; and
The election of executive directors with positions on either remuneration or audit committees.

We will normally abstain on:

The election of an executive director over the age of 70 where the appointment is not justified in the report and accounts.

We are supportive of initiatives to ensure that all non-executive and executive directors stand for re-election at least once every three years.

Appointment of non executive directors

The election of a powerful constituency of non-executive directors as a counter-balance to executive management is one of the most effective ways of ensuring that the wider interests of shareholders are heard in the boardroom.

We will normally vote in favour of:

A sufficiency of non executive directors on a board (the code recommends one third as a minimum); and
A majority within the non-executives of those the Fund Manager considers being independent of the company.

We will normally abstain on: The election of non-executive directors over the age of 70 where the appointment is not justified by the remuneration committee.

Executive remuneration

One of the most contentious and closely examined areas of corporate governance is that of executive remuneration, comprising directors' service contracts and long-term incentive plans. Whilst we do not consider it appropriate to comment on the quantum of a director 's pay, we believe it is important to ensure that remuneration is linked to results.

Service contracts

The length of directors' service contracts forms a central part of the Combined Code. The code recommends that existing contracts or notice periods be reduced to terms of 12 months rolling or less, and that new contracts should either be established on the same terms or fixed for an initial period and subsequently reduced. The basic principle of the code is to contain the length of directors' service contracts whilst tying directors into the long-term future of the company by offering incentives for good performance. From the shareholders' point of view, 'reward for results' clearly remunerates directors who enhance the value of their company.

At the opposite end of the scale, the reduction in the rolling elements of the contract ensures that shareholders in a company whose management is underperforming do not have to suffer the double penalty to having to overpay for the management's removal.

We will normally vote in favour of:

Rolling contracts of one year's term;
Two year rolling contracts where justified by the remuneration committee; and
Fixed contracts up to two years in length with subsequent reductions to 12 month rolling periods.

We will normally vote against:

Contracts whose terms lie outside any of the above.

Long- term incentive plans

We realise that the corollary of shorter service contracts is that directors be rewarded for exceptional company performance via long-term incentive plans.

We will support long-term incentive plans which;

Directly align the interests of directors with those of shareholders;
Establish challenging performance criteria for the plans to vest - performance at or below the median should not be rewarded;
Measure performance by total shareholder return in relation to the market or a range of comparable companies rather than growth in earnings per share;
Are long-term in nature (the code recommends a minimum of three years); and
Encourage long-term ownership of the shares once awarded.

We would ask our Fund Managers to enter into dialogue with companies to try to amend the terms of an incentive plan rather than simply to cast a vote against.

Political donations

We normally consider any political donations to be a mis-use of shareholders' funds and we will vote against resolutions proposing them.

Implementation

We intend our voting policy to be implemented across the FTSE All Share Index.

Voting custom and practice and levels of disclosure among overseas companies are not the same as for the UK and it is not possible to vote in accordance with this policy for non-UK equities at the current time. We would, however, look towards effecting our policy overseas when circumstances permit. Shareholder Resolutions will be considered on their merits and we will ask our Fund managers to contact the company secretary for further information on resolutions deemed to be contentious, if necessary.

The Director of Resources gives instructions to the Fund managers to vote our shares in accordance with this policy. In addition to our own records, we ask our Fund managers to keep a record of all votes cast so that we may, if required, inspect them for compliance purposes.

The exercise of a proxy vote is a somewhat blunt tool with which to improve standards of corporate governance, but it is not the only way in which we can influence corporate behaviour. Our Fund Managers meet, on a one to one basis, the senior management of many UK Plc's each year. Although the primary purpose of such meetings is to give management the opportunity to discuss matters of strategic importance, the highly interactive nature of these meetings means that this is a natural forum in which to raise matters such as corporate governance.

Benefits

We believe that the use of these meetings in conjunction with the disciplined and consistent voting policy detailed above contributes to higher standards of corporate governance in the UK. Linking the remuneration of directors to the fortunes of their company whilst reducing the rolling elements of contracts is a clear way of aligning the interest of directors with those of shareholders.

The establishment of challenging performance criteria, which must be met for incentive plans to vest, reinforces this objective. Importantly, these performance targets can often give an insight into companies' aims and ambitions which can otherwise remain obscure, and it is in this way that the right to vote on resolutions becomes supplementary to the investment process; not just a duty but a benefit.