british columbia investment management corporation · corporate governance and proxy voting...

CORPORATE GOVERNANCE AND PROXY VOTING GUIDELINES

BRITISH COLUMBIA INVESTMENT MANAGEMENT CORPORATION

OCTOBER 2003

TABLE OF CONTENTS

INTRODUCTION.........................................................................................................................................................1

1. BOARDS OF DIRECTORS ................................................................................................................................3

OVERVIEW.................................................................................................................................................................3 1.1 VOTING FOR DIRECTORS .............................................................................................................................3 1.2 INDEPENDENCE OF DIRECTORS....................................................................................................................4 1.3 SIZE OF BOARD OF DIRECTORS....................................................................................................................5 1.4 BOARD COMMITTEES ..................................................................................................................................5 1.5 STAGGERED BOARDS ..................................................................................................................................6 1.6 SEPARATION OF CHAIR AND CEO ...............................................................................................................6 1.7 CONFIDENTIAL VOTING...............................................................................................................................7 1.8 VIRTUAL MEETINGS AND ROTATION OF MEETING LOCATIONS...................................................................7 1.9 OTHER ISSUES PERTAINING TO THE BOARD OF DIRECTORS.........................................................................7

2. EXECUTIVE COMPENSATION ..................................................................................................................9

OVERVIEW.................................................................................................................................................................9 2.1 MANAGEMENT COMPENSATION ..................................................................................................................9 2.2 STOCK OPTION AND INCENTIVE COMPENSATION PLANS...........................................................................10 2.3 GOLDEN PARACHUTES ..............................................................................................................................11 2.4 DIRECTOR COMPENSATION & SHARE OWNERSHIP....................................................................................11

3. TAKEOVER PROTECTION ............................................................................................................................12

OVERVIEW...............................................................................................................................................................12 3.1 SHAREHOLDER RIGHTS PLANS/POISON PILLS ...........................................................................................12 3.2 CROWN JEWEL DEFENCES AND GOING PRIVATE TRANSACTIONS..............................................................13 3.3 LEVERAGED BUYOUTS AND LOCK-UP ARRANGEMENTS............................................................................14 3.4 RE-INCORPORATION ..................................................................................................................................14 3.5 BREAK-UP FEES.........................................................................................................................................14

4. SHAREHOLDER RIGHTS...............................................................................................................................16

OVERVIEW...............................................................................................................................................................16 4.1 DUAL CLASS CAPITAL...............................................................................................................................16 4.2 SUPER-MAJORITY APPROVAL OF TRANSACTIONS......................................................................................16 4.3 GREENMAIL...............................................................................................................................................17 4.4 LINKED PROPOSALS ..................................................................................................................................17 4.5 FAIR PRICE PROVISIONS ............................................................................................................................17 4.6 SHARE ISSUES - BLANK CHEQUE PREFERRED SHARES AND COMMON SHARES .........................................18 4.7 SHAREHOLDER PROPOSALS .......................................................................................................................18 4.8 DIVIDEND POLICY AND SHARE REPURCHASES ..........................................................................................19

5. APPOINTMENT OF AUDITORS ....................................................................................................................20

6. SOCIAL RESPONSIBILITY ............................................................................................................................21

OVERVIEW...............................................................................................................................................................21 6.1 OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES / ILO STANDARDS............................................21 6.2 GENETICALLY ENGINEERED FOODS ..........................................................................................................22

SHAREHOLDER RIGHTS PLANS – KEY DEFINITIONS .....................................................................................23

THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES ...................................................................24

THE INTERNATIONAL LABOR ORGANIZATION (ILO) STANDARDS ...........................................................26

British Columbia Investment Management Corporation 1

INTRODUCTION

MISSION STATEMENT The mission of bcIMC is to be accountable to its clients and to provide professional funds management for all asset classes, exercising the highest standards of prudence and fiduciary responsibility, while returning to the client the highest return for a given level of risk, at a reasonable cost.

PURPOSE OF THE GUIDELINES In order to fully and effectively carry out its mission on behalf of its clients, bcIMC has a responsibility to promote sound corporate governance policies and practices in the companies in which it invests. Good corporate governance contributes to overall corporate performance and long-term investment returns. Corporate governance is the set of principles, processes, structures, and rules that direct and control the affairs of a corporation. It involves the relationship and division of responsibilities among a company’s management, its board of directors, and its owners – the shareholders. Some aspects of corporate governance are established by legislative and regulatory frameworks, while other aspects are determined by individual companies. This document deals with the latter aspects of corporate governance (i.e. those that are within the control of a company’s management, board of directors and/or shareholders.) Each of the three parties – management, directors and shareholders – has specific roles and responsibilities in the governance and business of a corporation. bcIMC respects the responsibilities of management and directors, and does not seek to interfere in specific decisions within those areas of responsibility. However, as a shareholder, and as a fiduciary acting on behalf of its clients, bcIMC has a responsibility to ensure that management and directors act to fulfill their fiduciary duty to enhance shareholder value. Good corporate citizenship enhances shareholder value. Corporate governance provides a framework that will assist management and directors to remain focused on their objectives, and to be held accountable for their actions. Corporate governance practices should be used to align the interests of management, directors, and shareholders, so that all parties have an incentive to seek, and benefit from, enhanced shareholder value. An appropriate balance must be struck that reflects the duties and responsibilities of the parties.


Corporate governance is a key element in building good companies and in maintaining and enhancing shareholder value. It should not be simply viewed or treated as an administrative distraction by investors, directors or management. bcIMC recognizes that the “best approach” to corporate governance is evolving and the corporate governance guidelines need to be updated as new issues and new approaches to old issues arise over time. bcIMC first published its Corporate Governance and Proxy Voting Guidelines in May1996 and revised the document in the fall of 2001. The current revisions are incorporated in this document and updates have been included up to April 2002. Shareholders have two basic ways to influence the affairs of a corporation in which they invest – through the exercise of their proxy voting rights and through communications with management and directors. bcIMC is prepared to use both of these mechanisms to advance corporate dialogue and to encourage corporations to adopt sound corporate governance principles. bcIMC’s Corporate Governance and Proxy Voting Guidelines set out policy on certain key issues, as well as proxy voting guidelines. bcIMC encourages management and directors of companies to adopt policies consistent with those set out in these Guidelines. The voting guidelines are not intended to form a rigid set of rules that dictate how bcIMC will vote on every issue. Rather, the guidelines are intended to give general direction on how bcIMC may be expected to vote on particular issues. bcIMC will be flexible in its approach to corporate governance and, for example, has identified several issues in which voting decisions will be made on a case-by-case basis. However, at all times, fiduciary duties require that bcIMC vote all proxies in the best interests of its clients. Corporate governance is dynamic. Best approaches to corporate governance will continue to evolve, and bcIMC expects to regularly review its Corporate Governance and Proxy Voting Guidelines with its clients. As part of the ongoing nature of that review, bcIMC welcomes comments on the Guidelines from any and all interested parties. bcIMC will review actions taken under the Corporate Governance and Proxy Voting Guidelines with its board and clients at least once a year.


1. BOARDS OF DIRECTORS

OVERVIEW The board of directors plays a key role in corporate governance and, ultimately, overall corporate performance. A board’s key functions include: • providing leadership on corporate strategy; • ensuring there are systems in place to effectively manage and monitor risk; • oversight and evaluation of management and, where necessary, replacement of the Chief

Executive Officer; • oversight of the audit function; and • accountability to shareholders. These functions require boards to be comprised of experienced individuals with relevant, but diverse expertise. These functions also require boards to be able to act and make decisions independent of management. One of the basic rights and responsibilities of shareholders is the election of directors. In exercising this right, bcIMC will act to ensure that boards are effective, have independent directors and act in the best interests of the companies. bcIMC’s position on certain specific issues relating to the board of directors is set out in the following sections.

1.1 VOTING FOR DIRECTORS In general, votes will be cast for an entire slate of directors except when the existing board has been remiss in the performance of its responsibilities. However, bcIMC recognizes that shareholders are best able to make effective decisions regarding potential directors when they are able to vote separately for each director nominee, rather than being presented with a vote on a “slate” of directors. Separate votes allow for assessments and decisions to be made on individual nominees. Cumulative voting for directors allows shareholders to vote all their director votes for a limited number of nominees (shareholders get one vote per share per board position and can stack their votes, for example, in favour of one nominee). As a result, a minority of shareholders may be able to elect particular individuals to a board. Proponents argue that cumulative voting provides a method of ensuring minority representation on the board. However, cumulative voting has a risk of electing directors who see their role as representing the interests of special groups. This is contrary to a director’s duty to act in the best interests of all shareholders.


bcIMC’s Policy: bcIMC supports separate votes for individual directors. bcIMC is generally opposed to cumulative voting but will support cumulative voting in cases where a board has proved to be unresponsive. Voting Guideline: Vote in favour of separate votes for individual director nominees. Vote against cumulative voting unless cumulative voting will provide an independent voice on an otherwise unresponsive board of directors.

1.2 INDEPENDENCE OF DIRECTORS A board with a majority of unrelated directors is better placed to exercise judgments and make decisions that are independent from management than a board with a majority of related directors. Independent judgment and decision-making are in the best interests of a corporation and its shareholders. bcIMC supports the definition of an unrelated director contained in the December 1994 Report of the Toronto Stock Exchange Committee on Corporate Governance in Canada (“Where Were the Directors?”). That report defined an unrelated director as “a director who is independent of management and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding.” A related director is a director who is not an unrelated director. Related directors include (but are not necessarily limited to): • executives and retired executives of the company; • individuals with interlocking directorships (e.g., executives who sit on each other’s boards); • individuals such as legal counsel, investment bankers and commercial bankers that receive

material fees or other payment (directly or through an employer) for services from the company;

• individuals that are, or are employed by, a significant customer or supplier of the company; • individuals affiliated with entities that receive significant contributions from the company;

and • members of the immediate family of any person described above. It is important to note that the definition of related director is broader than the definition of an inside director. An inside director is an officer or employee of a corporation or any of the corporation’s affiliates. Conversely, the definition of an unrelated director is narrower than the definition of an outside director (i.e., a director that is not an officer or an employee). bcIMC’s Policy: bcIMC supports boards having a majority of unrelated directors. Because it is difficult, and in some cases impossible, for shareholders to determine if an individual director is unrelated, companies should disclose on an annual basis whether individual directors are unrelated directors.


Voting Guideline: bcIMC may vote against a slate of directors because of its composition if the directors have been unresponsive to shareholders concerns or corporate performance has been unsatisfactory. Vote in favour of proposals that boards be comprised of a majority of independent or unrelated directors.

1.3 SIZE OF BOARD OF DIRECTORS The number of directors on a board is a key factor in the board’s effectiveness. A board must be of a minimum size to ensure diversity of opinion and expertise, and to increase the likelihood of management being challenged when required. However, a board’s effectiveness generally declines once a certain threshold size has been reached. In a large board individual directors may lose a sense of responsibility and accountability, opinions and advice may not be voiced as effectively as they otherwise would be, and it may be difficult to establish an effective decision-making process. bcIMC’s Policy: An appropriate board size is generally between 7 and 16 directors. However, the actual size of a board should be set within the context of the circumstances faced by the particular company. Voting Guideline: Do not withhold or vote against a slate of directors because of the size of the board of directors unless corporate performance has been unsatisfactory. Vote against increases in the size of the board above acceptable thresholds (i.e., 16) and when the proposed change might be used as an anti-takeover device.

1.4 BOARD COMMITTEES Boards of directors often appoint committees to deal with specific issues and to perform particular functions. Typical committees and their functions include: • Nominating Committee – assessment of existing directors, identification of needs, and

identification, recruitment, nomination and orientation of new directors.

• Compensation Committee – assessment of compensation for senior management.

• Audit Committee – internal control and management information systems. The authority of all committees must be clearly set out; for example, whether a committee has authority to make decisions or simply to make recommendations to the full board. The committees must function independent of management. bcIMC’s Policy: The Board or committees of the Board should perform the functions set out above. The Board or committees of the Board should be comprised exclusively of outside directors, the majority of whom are also unrelated directors. In addition, the audit committee should consist solely of individuals with financial expertise or financial literacy.


Voting Guideline: Vote in favour of proposals suggesting that a board’s nominating, compensation, and audit committees be comprised mostly or entirely of unrelated directors. Vote in favour of proposals requiring the audit committee to consist solely of individuals with financial expertise or financial literacy. Vote in favour of proposals requiring the disclosure of the financial expertise and financial literacy of audit committee members.

1.5 STAGGERED BOARDS With a “staggered” board, directors are elected in two or more classes and serve for terms longer than one year. For example, with a three-year staggered term, one-third of the members of a board of directors are elected each year for three-year terms. Proponents of staggered boards argue that they promote continuity in direction and facilitate long-term planning. However, staggered boards make it difficult to replace individual directors who are not effective, or to change a majority of the board if a change in direction is required or change in control is sought. bcIMC’s Policy: bcIMC is opposed to staggered boards. Voting Guideline: Vote in favour of annual elections for all directors and against staggered terms. Vote for resolutions to abolish staggered boards.

1.6 SEPARATION OF CHAIR AND CEO A board’s ability to exercise independent decision-making is weakened if one person fills both the positions of Chief Executive Officer (“CEO”) and Chair of the board of directors. The board will be more effective in carrying out its critical roles in appointing, monitoring and, if necessary, replacing the CEO, if different individuals hold the positions of CEO and Chair. Separating the roles assists in establishing an appropriate balance of power between management and directors, increases accountability and helps ensure that the board serves to represent the interests of shareholders, not management. In some cases, however, there may be benefits to having one person fulfill both roles. This may be the case in new companies, or companies that have undergone a recent re-organization. Even in these cases, however, the benefits of having one person fill both positions are likely to be temporary and the company should ultimately separate the two positions. bcIMC’s Position: bcIMC supports having the positions of Chair and CEO filled by separate individuals, although it recognizes that there may be circumstances (e.g., when a company is small or when it has recently been re-organized) which necessitate having one person fulfill both positions. Voting Guideline: Do not vote against a slate of directors because one person fills the positions of Chair and CEO unless corporate performance has been unsatisfactory.


1.7 CONFIDENTIAL VOTING Open balloting at annual meetings and special general meetings creates the potential for coercion and/or resolicitation of votes. Confidential voting removes (or at least lessens) the opportunity for coercion and resolicitation, and eliminates the appearance of impropriety and unfairness. bcIMC’s Policy: bcIMC supports confidential voting by shareholders. Voting Guideline: Vote in favour of confidential voting resolutions.

1.8 VIRTUAL MEETINGS AND ROTATION OF MEETING LOCATIONS bcIMC supports management proposals to allow corporations to hold annual general meetings exclusively via phone, internet or other means of communication, provided it is permitted in the corporation’s bylaws. bcIMC also supports the idea of rotating the location of a company’s annual meeting between cities where there is a large concentration of shareholders. Both virtual meetings and rotation of meeting locations may allow more shareholders to have opportunities to participate in the meeting. bcIMC’s Policy: Vote in favour of management proposals allowing virtual meetings or rotation of meeting locations. Vote against shareholder proposals demanding virtual meetings or rotation of meeting locations, as such decisions should be left to the board. Voting Guideline: Vote in favour of management proposals allowing virtual meetings or rotation of meeting locations. Vote against shareholder proposals demanding such changes.

1.9 OTHER ISSUES PERTAINING TO THE BOARD OF DIRECTORS The preceding sections outline bcIMC’s position on a number of major corporate governance issues relating to a company’s board of directors. The issues addressed are not a comprehensive list of all corporate governance issues relating to boards of directors. The following comments set out bcIMC’s position on some of the additional issues that companies should consider as part of their corporate governance practices. bcIMC’s Position: • Diversity – Boards should have members with differing backgrounds and expertise. • Commitment – Individual board members should be expected to attend all board meetings

and prepare in advance of the meetings. A director’s continued service should be reviewed if he/she does not attend at least two-thirds of board meetings.

• Number of Directorships – Individual directors should serve on no more than 6 boards. • Effectiveness – Boards should have processes in place to rate the effectiveness of both the

board as a whole and individual directors, and be prepared and willing to make changes as necessary.


• Terms – Boards should consider establishing a maximum length of service for directors. • Indemnification – Directors should be provided with an indemnification for their actions as

directors, but only where such actions were done honestly and in good faith with a view to the best interests of the corporation. In criminal matters, indemnities should also be limited to actions where a director had reasonable grounds to believe that his/her conduct was lawful.

• Approach to Corporate Governance – Boards must be willing to engage in dialogue concerning corporate governance practices, establish acceptable corporate governance standards, disclose those standards and regularly evaluate the effectiveness of those standards.

• Approach to Shareholders – Boards must ensure there is a corporate willingness to communicate directly with shareholders and disclose information that demonstrates accountability to shareholders. There should be full disclosure of director compensation and meeting attendance.

• Proxy Voting – Boards should include opposing views on proxy circulars and should publicly communicate proxy voting results.

• Evaluation – Boards should implement annual evaluations for the performance of directors and the effectiveness of committees and disclose the results.

Voting Guideline: Where applicable, vote for proposals that are consistent with most of the above positions. Except with respect to attendance at board meetings, do not vote against a slate of directors because some of the policies are not met, unless the directors have been unresponsive to shareholders’ concerns or corporate performance has been unsatisfactory. Vote against or withhold voting for those directors who have a poor attendance record (less than two-thirds) at board meetings.


2. EXECUTIVE COMPENSATION

OVERVIEW Appropriately designed compensation structures can serve to align the interests of shareholders, directors, and management, providing rewards to all parties from long term enhancement of shareholder value. In addressing compensation issues, companies are best served by implementing a Compensation Committee consisting exclusively of outside directors, with a majority being unrelated directors. This Committee should be tasked to ensure that compensation arrangements are structured so that they contribute to enhancing shareholder value. On a broad level, bcIMC believes that compensation plans should: • build long term shareholder value; • attract qualified management without being excessive; • reward success; • correlate compensation to enhanced value within a specified time period; and • comply with pay equity standards. Shareholders should be informed annually about the principles and structure of a company’s executive compensation system. Detailed policies and guidelines with respect to specific executive compensation issues are set out in the following sections.

2.1 MANAGEMENT COMPENSATION Companies must strike a balance between compensation packages that are required to attract and retain qualified executives, on the one hand, and showing moderation and restraint on the other. Excessive compensation reduces shareholder value. Companies should also seek to align the interests of management with the interests of shareholders through compensation arrangements that are linked to performance. bcIMC’s Policy: bcIMC is opposed to executive compensation that is excessive and not in the best interests of shareholders. At least part of total compensation arrangements for top management should be linked to the company’s performance. Voting Guideline: Vote for compensation caps or restraints in cases where executive compensation is excessive. Vote in favour of performance linked compensation plans that are not overly restrictive or arbitrary. Consideration will be given to withholding votes from, or voting against, directors who support excessive compensation or compensation arrangements that are not in the interests of shareholders.


2.2 STOCK OPTION AND INCENTIVE COMPENSATION PLANS Properly designed stock option and other incentive compensation plans can serve to align the interests of management with the interests of shareholders. Such plans should be related to individual and corporate performance. bcIMC’s Policy: The following positions will guide bcIMC’s voting on incentive compensation plans: Price – Options should be issued at fair market value and should expire within 5 years. Repricing – The price should not be lowered on options already granted in the event of a reduction of share price or market under-performance. Dilution – Stock option plans may be approved if they are not excessively dilutive. Stock option plans should generally not authorize the issuance of more than 5 percent of all shares outstanding. Plans authorizing the issuance of greater than 5 percent of the outstanding shares will be considered on a case-by-case basis, and should meet one or more of the following criteria: • the plan is open to all or a large number of employees; • the plan is consistent with industry standards that must be met for competitive reasons; • the company is in a difficult financial situation; and/or • the company’s compensation policy is significantly below market rates. Burn rate – The number of options granted in a given year expressed as a percentage of shares outstanding should be restricted to less than 1 percent of the shares outstanding (or 20 percent of the options available under the plan). Board Discretion – Plans should not give the board discretion in setting the terms and conditions of the options. A shareholder-approved formula for director options is preferable. Eligibility – Outside directors should not be eligible for stock option plans. However, if they are eligible, stock option grants to outside directors will only be approved if they are non-discretionary, clearly defined, contain fixed issue and exercise rules, and do not represent excessive dilution. Award types – The type of award must be consistent with other policies set out in this section and serve to align the interests of management and shareholders. Stock appreciation rights, phantom stock awards, and re-load options will generally not be supported. Vesting –Restricted stock must not be 100 percent vested when granted, but must vest over a specified period of time. Similarly, options should have a minimum holding period of at least three years before they can be exercised. Change in control – Plans with change-in-control provisions may be supported provided that the provisions do not allow option holders to receive more for their options than shareholders would receive for their shares. Change in control arrangements developed in the midst of a takeover fight will be opposed, as will options or bonuses being granted to outside directors in the event of a change in control. Method of payment and loans – In general, corporate loans, even at market rates, should not be made to allow employees to acquire stock or options. Plans that provide for interest-free or low interest loans by the company will be opposed.


Omnibus Stock Option Plans – Omnibus stock option plans (i.e., where there are three or more types of awards in one plan) will not be supported. Shareholders must be able to vote on each component of such a plan. Employee Stock Ownership Plans – bcIMC favours employee stock ownership plans as long as the plan does not represent excessive dilution and as long as the discount does not exceed 10 percent of the stock’s market value. Disclosure – Companies should clearly disclose the cost of option plans. Expensing Stock Options – bcIMC supports proposals to expense stock options in financial statements. Voting Guideline: Each stock option plan is assessed in its entirety on a case-by-case basis. Support stock option plans that meet the above guidelines. Vote against stock options plans that fail to meet most of the guidelines. Consideration will be given to withholding votes from, or voting against, directors who support stock option plans that do not meet the above guidelines.

2.3 GOLDEN PARACHUTES Golden parachutes are severance payments to top executives who are terminated or demoted following a takeover. Proponents of golden parachutes argue that they are justified on the grounds that they provide executives with financial security in the case of an unexpected change in control, provide a disincentive to “jumping ship” during takeover speculation, and allow executives to make decisions in the best interests of the company and its shareholders, regardless of their own welfare, in the event of a takeover. Opponents of golden parachutes argue that they result in excessive compensation and/or entrench management faced with a takeover possibility. bcIMC’s Policy: bcIMC is opposed to golden parachutes. Voting Guideline: Vote against golden parachutes.

2.4 DIRECTOR COMPENSATION & SHARE OWNERSHIP Similar to employee share ownership programs, share ownership by directors can serve to align directors’ interests with the interests of shareholders. However, mandatory share ownership requirements may impose a barrier to attracting otherwise qualified directors. bcIMC’s Policy: bcIMC does not oppose shares being part of the compensation package for directors. However, bcIMC opposes minimum share ownership requirements as a condition of being a director. Voting Guideline: Vote against proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or to remain on the board.


3. TAKEOVER PROTECTION OVERVIEW Takeover protection measures may serve primarily to entrench management, rather than to enhance shareholder value. Some measures, in fact, may hinder the growth or realization of long-term shareholder value. Directors and corporate officers have a fiduciary duty to a company’s shareholders. Takeover protection measures must be reviewed in light of this duty.

3.1 SHAREHOLDER RIGHTS PLANS/POISON PILLS Shareholder rights plans, such as “poison pills”, are a popular takeover defence for widely held public corporations. A rights plan involves the distribution of rights to acquire additional shares of a corporation to all of the corporation’s shareholders in the event of a takeover bid. It is usually specified that in case of the acquisition of a specified percentage of shares by any person, defined as an “acquiring person", without the concurrence of the corporation's board of directors, holders of the rights (other than the acquiring person and its allies) are entitled to purchase additional shares from the corporation at less than the current market price. The effect is to dilute significantly the holdings of the acquiring person to an extent that makes a hostile takeover bid for the corporation uneconomical. From a corporate governance perspective, legitimate purposes for a rights plan include: • equal treatment of the shareholders of a corporation in connection with a change in control;

and • providing directors of a corporation subject to a takeover bid with additional time to attempt

to maximize shareholder value by developing an alternative transaction or soliciting a competing takeover bid.

However, shareholder rights plans may not be in the best interests of shareholders. They can put too much power in the hands of the board, at the expense of shareholders. There is a risk that such plans simply serve to entrench management by making takeovers more difficult. They may also adversely impact share prices, and prevent shareholders from considering potentially attractive offers to buy their shares. A "new generation" of rights plans has developed that addresses many of the corporate governance concerns raised by earlier plans. bcIMC will consider voting in favour of new generation rights plans. In order to receive favourable consideration, these rights plans must, as a minimum, have the following features: Definitions – Key definitions (of “Acquiring Person, Affiliate and Associate”, “Beneficial Ownership” and “Permitted Bid”, see Appendix A) should remove unnecessary over-breadth and ambiguity, removing discretion of directors to preclude a take-over bid arbitrarily.


Ownership Trigger - Rights plans are triggered by a person acquiring beneficial ownership of a specified percentage of voting shares. A person who acquires the specified percentage is defined as an "acquiring person". A threshold level of at least 20 percent is recommended before a rights plan is triggered. Redemption and Waiver - Redemption and waiver provisions should not allow a board of directors to preclude a takeover bid arbitrarily. If a board of directors wishes to waive or redeem a rights plan to permit an acquisition of control by means other than a takeover bid made to all of the corporation's shareholders, prior consent of the shareholders should be required. The board of directors should be able to waive the application of the rights plan to allow a non-permitted takeover bid to be made by means of a takeover bid circular to all shareholders provided that the plan is waived for all other contemporaneous bids made by the same means. Exemptions for Investment Managers - Exemptions should be provided for the activities of portfolio managers, trust companies, securities depositories and pension funds, in order to prevent the inadvertent triggering of the rights plan. Exempt Lock-up Agreements - Shares held by a person who enters a lock-up agreement with an offeror should not be treated as beneficially owned by the offeror and thus should not trigger the rights plan. Supplement and Amendment - Substantive amendments to a rights plan should require prior shareholder approval. Duration of the Plan – Shareholder rights must be submitted to a shareholder vote and they should require reconfirmation every three years. bcIMC’s Policy: Shareholder rights plans will be assessed on a case-by-case basis to determine whether they are consistent with the principles set out above and are in the best interests of shareholders. Voting Guideline: Vote against shareholder rights plans unless it is determined that a specific plan is in the best interests of shareholders.

3.2 CROWN JEWEL DEFENCES AND GOING PRIVATE TRANSACTIONS Under a crown jewel defence, a company sells assets to a friendly third party in order to thwart a take-over bid. Such transactions may adversely affect share value. In a going private transaction, minority shareholders can be required to sell their equity interests to a major shareholder who assumes control. In Canada, approval by a majority of the minority shareholders is usually required for such transactions. In addition, shareholders have an appraisal remedy that allows them to seek the fair value of their shares if the transaction includes substantially all of the assets of a corporation or changes the essential nature of a corporation’s business.


bcIMC’s Policy: Crown jewel defences and going private transactions will be assessed on a case-by-case basis to determine whether they are in the best interests of shareholders. Voting Guideline: Vote against crown jewel defences and going private transactions unless it is determined that the transaction is in the best interests of shareholders.

3.3 LEVERAGED BUYOUTS AND LOCK-UP ARRANGEMENTS A leveraged buyout is a proposal to buy a company by a group of financial buyers that includes and is supported by the management of the company. Leveraged buyout transactions may provide opportunities for shareholders to maximize investment returns. However, such transactions also have the potential to primarily serve the interests of existing management. Lock-up arrangements are agreements by some shareholders to sell their shares to the target company or to a friendly third party. Such arrangements may prevent competing bids for a company. bcIMC’s Policy: Leveraged buyout proposals and lock-up arrangements will be evaluated on a case-by-case basis to determine if they are in the best interests of shareholders. If a company is the subject of a leveraged buyout proposal, other potential bidders should have the opportunity to investigate the company and make competing bids. Lock up arrangements should only be used if other alternatives to maximizing value have been exhausted. Voting Guideline: Withhold votes from, or vote against the slate of directors at the first opportunity, if it is evident that directors have supported leveraged buyout transactions or lock up arrangements that were not in the best interests of shareholders.

3.4 RE-INCORPORATION Re-incorporation proposals may be justified on financial, commercial or economic reasons. However, they may also be used as part of an anti-takeover defence or to limit director’s liability. bcIMC’s Policy: Re-incorporation proposals will be assessed on a case-by-case basis. Voting Guideline: Vote in favour of re-incorporation proposals that are justified on financial, commercial or economic grounds. Vote against re-incorporation proposals that are used as part of an anti-takeover defence or to limit directors’ liability. Vote against re-incorporation proposals that aim to take advantage of more relaxed corporate governance rules.

3.5 BREAK-UP FEES Break-up fees are intended to compensate a company for the time and expenses related to a takeover or merger in the event that the takeover or merger is not completed. Excessive break-up fees deter other potential bidders by making any acquisition more expensive and reduce the value received by shareholders.


bcIMC is opposed to high break-up fees that do not represent time and effort in making the bid. Generally, break-up fees over 2% will trigger a full review of the circumstances. bcIMC’s Policy: Break-up fees will be assessed on a case-by-case basis. Voting Guideline: Vote against proposals with break-up fees higher than 2% of the price payable under the bid, unless it is determined that the specific proposal is in the best interests of shareholders.


4. SHAREHOLDER RIGHTS

OVERVIEW Share ownership rights are assets that should be protected and managed with the same care, skill and diligence as other assets. These rights include the right to approve changes to the company’s constitution, to elect members of the board of directors, to participate and vote, in person or through proxy, in shareholder meetings, and to obtain relevant information on the corporation in a timely manner, in addition to the right to share in the company’s profits. bcIMC will exercise its shareholder rights in the best interests of its clients with the aim of enhancing long-term investment returns. Through their corporate governance framework, companies should recognize and protect shareholders’ rights. The following sections address some specific issues that impact on shareholders’ rights.

4.1 DUAL CLASS CAPITAL Dual class share structures that contain unequal or subordinate voting shares provide different rights and privileges for different shareholders. Such shares violate the principle of “one share, one vote” and entrench control and power in the hands of select shareholders. Dual class shares with equal but limited voting shares can also be used to effectively provide different rights and privileges to different shareholders, and entrench current management. bcIMC’s Policy: bcIMC is opposed to dual class capital structures. Voting Guideline: Vote against proposals to authorize or issue common shares that do not have full and equal voting rights.

4.2 SUPER-MAJORITY APPROVAL OF TRANSACTIONS Super-majority vote requirements (67 percent and higher) in a company’s charter or bylaws are used to ensure that there is broad agreement on fundamental issues affecting the future of a company. While the nature of a particular issue may warrant a super-majority vote requirement, caution must be exercised in setting the required threshold. A threshold that is too high may allow a minority to thwart the will of a large majority. bcIMC’s Policy: While any threshold is arbitrary, bcIMC believes that a super-majority vote requirement should not exceed 67 percent. A two-thirds vote of shareholders should strike an appropriate balance between ensuring broad agreement on fundamental issues and majority rights. Voting Guideline: Vote against super-majority voting requirements that exceed 67 percent of the outstanding shares. Vote in favour of proposals to lower super-majority voting requirements that exceed 67 percent.


4.3 GREENMAIL Greenmail involves the use of a company’s corporate funds to repurchase the shares from a corporate raider or hostile acquirer in exchange for the commitment to terminate a takeover bid. The payment is usually at a premium over the market value of the shares. A greenmail payment is discriminatory in that it is not offered to all shareholders. bcIMC’s Policy: bcIMC does not support the payment of greenmail and supports anti-greenmail resolutions. Voting Guideline: Vote in favour of anti-greenmail resolutions. Vote against greenmail transactions. Withhold votes from, or vote against the slate of directors at the first opportunity, if no vote is offered on a greenmail transaction.

4.4 LINKED PROPOSALS Linked proposals combine two issues for the purpose of obtaining shareholder approval. Examples of linked proposals include fair price amendments linked to super-majority amendments and the linking of corporate governance issues with the payment of a dividend or the granting of a right. Linked proposals may confuse the issues at hand. While there are occasions where both elements of a linked proposal are beneficial to shareholders, linked proposals are often used to make one element of a proposal more acceptable than it would be on its own merits. In the latter case, linked proposals can be used as a form of coercion. bcIMC’s Policy: bcIMC does not support linking proposals. Specific linked proposals will be reviewed on a case-by-case basis to determine whether shareholder interests are harmed by either element of the proposal. Voting Guideline: Vote against linked proposals unless the proposal, on balance, enhances shareholder value.

4.5 FAIR PRICE PROVISIONS Fair price provisions require a bidder to pay the same price for all shares purchased. The “fair price” is usually defined as the highest price paid by the bidder for any shares acquired before the start of the tender offer. Such provisions guard against two-tiered tender offers, in which a higher price is paid for an initial controlling position, and lower prices paid for remaining shares. bcIMC’s Position: bcIMC supports fair price provisions, provided they are not linked to other governance issues. Voting Guideline: Vote in favour of fair price provisions as long as they are not linked to other governance issues.


4.6 SHARE ISSUES - BLANK CHEQUE PREFERRED SHARES AND COMMON SHARES Shareholders may be asked to authorize additional common shares for a number of reasons, including to implement a stock split, to aid in a restructuring, acquisition or private placements, to provide sufficient shares for use in stock option and other compensation plans, and to implement an anti-takeover plan. In some cases, authorization of additional shares serves a legitimate purpose and is in the best interests of shareholders. However, in other cases, the additional shares may be used in ways that dilute the value of outstanding shares and are not in the best interests of existing shareholders. Blank cheque preferred shares carry a fixed dividend and are better secured than common shares. Blank cheque preferreds give the board of directors broad discretion to fix voting, dividend, conversion and other rights and privileges. Once such shares have been authorized, the shareholders have no authority to determine how or when they will be allocated. Preemptive rights permit shareholders to share proportionately in any new issues of stock of the same class. The opportunity usually comes through a rights offering. In North America, shares with preemptive rights are rarely issued due to its higher cost to the companies. In other parts of the World, however, shares with preemptive rights are often issued. bcIMC’s Position: bcIMC is opposed to unlimited share issues and blank cheque preferred shares. Proposals for limited share issues will be reviewed on a case-by-case basis to ensure that they meet a legitimate, clearly defined business purpose, and are in the best interests of shareholders. If the additional stock could be used as an anti-takeover defense, votes will be cast against the proposal. In general, for companies with smaller shareholder base or in a market with restrictions on foreign ownership, vote for share issuance with dilution level up to 50% with preemptive rights and against share issuance level without preemptive rights. If the company has large shareholder base and the shareholders could preserve their relative interest through purchases of shares on the open market with ease, vote for share issuance with dilution level up to 50% for share issuance without preemptive rights. Voting Guideline: Vote against unlimited share issues and blank cheque preferred shares. Vote for limited share issues up to 50% dilution only if the issues meet a legitimate, clearly defined business purpose, and are in the best interests of shareholders.

4.7 SHAREHOLDER PROPOSALS Shareholder proposals can be beneficial to both corporations and their shareholders. Shareholders get an opportunity to raise issues and be heard, while corporations receive the benefit of shareholders’ insights, and the knowledge of the extent of interest or concern over particular issues.


However, proposals must respect and not seek to alter the fiduciary responsibility of officers and directors to the company’s shareholders. Proposals should also not require management or directors to consider a wide range of discretionary factors in making business decisions. Directors must act in accordance with their fiduciary obligations and make decisions in the best interests of shareholders. bcIMC’s Policy: In general, bcIMC supports the right of shareholders to propose resolutions. Specific proposals will be viewed on a case-by-case basis. bcIMC does not support proposals that: • require management or directors to consider a wide range of discretionary factors in making

business decisions; • are submitted for the purposes of enforcing personal grievances or for securing publicity for a

personal matter; • do not have a significant relationship to the corporation’s business or affairs; and • are not within the authority of shareholders to decide. Voting Guideline: Vote against proposals that do not meet the foregoing criteria. Proposals that meet the criteria will be considered on a case-by-case basis.

4.8 DIVIDEND POLICY AND SHARE REPURCHASES Returns to shareholders can be in the format of either dividend payments or capital gain through share appreciation. Share repurchases can add to capital gains by reducing the number of shares outstanding or provide a support to share prices. bcIMC believes that it is important for the board to have the discretion on appropriate dividend payments as well as share repurchases. Therefore, bcIMC generally supports management proposals on dividends payment and share repurchases. However, all proposals are considered on a case-by-case basis. bcIMC may oppose a particular management decision or support a shareholder proposals depending on the circumstances. bcIMC’s Policy: Proposals will be considered on a case-by-case basis. In general, bcIMC supports management proposals on dividends and share repurchases. Voting Guideline: Proposals will be considered on a case-by-case basis. Generally vote in favor of management proposals on dividends and share repurchases.


5. APPOINTMENT OF AUDITORS The appointment of a company’s auditor is one of the primary responsibilities of the company’s shareholders. To ensure that recommendations concerning the auditor are made, and seen to be made, independent of management, the auditor should be recommended by an Audit Committee composed exclusively of outside directors, the majority of whom are unrelated directors. bcIMC’s Position: bcIMC will review the recommendations by the Audit Committee and board of directors to ensure the independence and accountability of auditors, especially in the following circumstances: • the recommended auditor is replacing a previous auditor because of a disagreement between

the previous auditor and management or the board; • the audit firm receives significant non-audit consulting fees from the company; • the same firm and/or partner in the firm has performed the audit for excessively long periods

of time; and • the audit firm has been derelict in its duties in the past. The audit committee must pre-approve all audit and non-audit services provided by the auditor. Companies should disclose all relationships with the audit firm and the amount of fees paid to the auditors for the audit and non-audit consulting services, preferably in four fee categories: audit fees, audit-related fees, taxes, and all other fees. bcIMC believes that company auditors should focus on the audit function and will examine fee disclosures to determine if non-audit fees are excessive. Voting Guideline: Recommendations will be considered on a case-by-case basis. Vote against the auditors recommended by the board of directors if companies fail to disclose all relationships with the audit firm, or the fees paid to the auditors for all other consulting fees exceeded the fees paid for the total of audit, audit-related services, and tax compliance or preparation fees. Vote in favour of shareholder proposals requesting companies to reduce the all other consulting fees paid to their auditors to the acceptable limit.


6. SOCIAL RESPONSIBILITY

OVERVIEW Under the Pension Benefits Standards Act, pension plan investments, loans and other pension plan financial decisions must be made in the best financial interests of plan members, former members and other plan beneficiaries. Similarly, corporate officers and directors have a duty to act in the best interests of a company’s shareholders. Neither bcIMC nor a company’s officers or directors can subordinate these interests to other economic or social issues. However, bcIMC believes that companies that do not give careful consideration to social responsibility issues risk failing to maximize shareholder value. As fiduciaries, corporate officers and boards of directors must put the interests of shareholders ahead of beliefs or actions that are not in the best interests of shareholders. At the same time, companies must be cognizant of the impact that their actions on social issues have on shareholder value. Most shareholder resolutions dealing with social responsibility issues involve requests for information on a company’s activities with respect to a particular issue. The appropriate response to some of these issues is straightforward. For example, compliance with human rights laws is unequivocally supported. Other issues, however, are more complex and may involve subjective factors. In addition to voting its proxies, bcIMC, on behalf of clients, may also make informal submissions to companies on matters of social responsibility.

6.1 OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES / ILO STANDARDS The Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises (see Appendix B) provide voluntary principles and standards for responsible business conduct, consistent with domestic and international laws. The Guidelines are widely accepted by governments of thirty-three adhering countries as well as business communities and labour organizations. Moreover, the Guidelines do not impose onerous requirements on corporations. bcIMC believes a company’s labor policy could be strengthened by endorsing the International Labor Organization (ILO) standards (see Appendix C), which are reflected fully by the OECD Guidelines. bcIMC also believes in transparency for shareholders as a matter of good corporate governance. As employment diversity issues can impact corporate reputation, and many companies already disclose information on these issues, bcIMC believes that this is a matter that the companies should address, and report their findings to the shareholders. bcIMC’s Policy: bcIMC expects companies to approach social and environmental issues in a manner that is responsible to the communities and that serves to maximize shareholder value. bcIMC believes that, where applicable, companies should operate in accordance with the OECD Guidelines for Multinational Enterprises. In addition, bcIMC supports all shareholder proposals asking companies to adopt policies that reflect fully the principles contained in the ILO standards or disclose information on employment diversity issues.


Voting Guideline: Withhold votes from, or vote against, a suggested slate of directors that has been unresponsive to social or environmental issues and where corporate performance has been unsatisfactory.

6.2 GENETICALLY ENGINEERED FOODS Genetically engineered food is not a recent phenomenon and will continue to be a driving force in the years to come. The United States, Canada, China and Argentina account for 99% of the genetically engineered crops in the world and will continue to improve and develop new products. It is essential that the regulatory process recognize that those products could prove to be potentially harmful. In addition, requirements should be in place for long-term testing of genetically engineered foods. Pushing corporations to adhere to higher standards within the field of genetic engineering will decrease the likelihood of harmful products entering the marketplace. Shareholders must be confident that corporations are going to be proactive in identifying the long-term effects of genetically engineered foods. If corporations are not recognizing the impact, then the effects on shareholder value could be severe. bcIMC’s Policy: bcIMC supports shareholder proposals that push corporations to strengthen their long-term testing procedures and protocol in genetically engineered food. Voting Guideline: Vote in favor of proposals for increased regulation in the area of testing and approval of genetically engineered foods. Vote in favor of proposals for stronger long-term testing procedures and protocol in genetically engineered foods.

CORPORATE GOVERNANCE AND PROXY VOTING GUIDELINES APPENDIX A


SHAREHOLDER RIGHTS PLANS – KEY DEFINITIONS In order for a shareholder rights plan to receive favourable consideration, definitions of key terms must be consistent with the following: Acquiring Person, Affiliate and Associate – The definitions of acquiring person, affiliate, and associate must not be overly broad such that they impede or prevent permitted take-over bids. Beneficial Ownership - The definition of beneficial ownership determines when a person holds sufficient shares of a corporation to become an acquiring person and thus triggers the rights plan. The definition of beneficial ownership should be limited to securities that are beneficially owned by the acquiring person and any person with whom the person is acting jointly or in concert. The definition should be restricted to the acquisition of voting shares and should not be based on voting rights or agreements. Permitted Bid - The definition of permitted bid determines whether a bid can be accepted by shareholders without agreement by the corporation's directors. A permitted bid should be defined to require that: • the bid be made by means of a takeover bid circular to all shareholders other than the offeror; • the bid remain open for a minimum period of 35 to 60 days (a period sufficient to enable

directors of a corporation to accomplish the purposes of a poison pill); • at least 50 percent of the shares held by independent shareholders be deposited into the bid

(minimum deposit requirement); • the bid be extended for at least ten days after an announcement that the deposit condition has

been achieved; and • partial bids be allowed, but only if the rights plan contains a shareholder approval mechanism

that requires a minimum deposit of 50 percent of the shares held by independent shareholders.

CORPORATE GOVERNANCE AND PROXY VOTING GUIDELINES APPENDIX B


THE OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES Originally created in 1976, the OECD Guidelines for Multinational Enterprises (Guidelines) are recommendations to Multinational Enterprises (MNEs) to promote corporate social responsibility. The Guidelines are an important part of the OECD Declaration on International Investment and Multinational Enterprises. The Guidelines: • Provide voluntary principles and standards for responsible business conduct, consistent with

domestic and international laws; • Assist the MNEs in aligning business objectives with community values, thus creating

benefits for both them and the communities in which they operate; • Provide a multilateral framework of standards and principles that complement and support

these private sector initiatives. The 2000 revision to the Guidelines benefited from an extensive dialogue with the business community, labour representatives, non-governmental organizations and non-member governments. The Canadian Council for International Business (CCIB), in a strategic alliance with the Canadian Chamber of Commerce, was actively involved in the 2000 review of the Guidelines and is the Canadian voice within the Business and Industry Advisory Committee (BIAC) to the OECD. Both the Canadian Labour Congress (CLC) and the Confédération des syndicats nationaux (CSN) were involved in the 2000 review of the Guidelines and are the Canadian voices at the Trade Union Advisory Committee (TUAC) at the OECD. The Guidelines provide general as well as specific recommendations in the following areas:

• General Policies: Sets out general areas of good corporate behaviour, including respect for human rights.

• Disclosure: Covers the public dissemination by MNEs of reliable and relevant information on their activities.

• Employment and Industrial Relations: Covers, inter alia, the issues of non-discrimination, forced labour, child labour, and freedom of association and collective bargaining.

• Environment: Covers issues such as MNEs' environmental management systems and contingency planning.

• Combatting Bribery: Aims to eliminate bribery of foreign public officials. • Consumer Interest: Seeks to ensure that MNEs respect consumer rights, including

regarding the quality and safety of products. • Science and Technology: Recognizes that MNEs can play an important role in improving

local knowledge without compromising their intellectual property rights. • Competition: Promotes respect for competition rules and avoidance of anti-competitive

behaviour. • Taxation: Addresss MNE compliance with tax laws and regulations.

CORPORATE GOVERNANCE AND PROXY VOTING GUIDELINES APPENDIX B


The Guidelines are not a substitute for, nor do they override, Canadian law or any other country's laws. They represent supplemental standards and principles of behaviour and, as such, do not create conflicting requirements. In addition, the Guidelines are clear that the recommendations represent good corporate practice wherever enterprises operate, i.e., their coverage is not limited to the OECD area. Governments through their National Contact Points (NCPs) are responsible for promoting the Guidelines, handling enquiries and helping to resolve issues that arise in specific instances. New guidance on implementation has been provided in the form of a non-binding procedural guidance document. The OECD Committee on International Investment and Multinational Enterprises (CIME) remains the responsible body for clarifying the Guidelines and overseeing their effectiveness. The intent of the Guidelines is to promote good international corporate citizenship, which will in turn enhance shareholder value. The Guidelines are the only multilaterally-endorsed comprehensive code of conduct that governments have committed to promote. The fact that they set out the expectations of the governments of thirty-three adhering countries gives them added credibility and strength as a policy tool to promote corporate social responsibility.

CORPORATE GOVERNANCE AND PROXY VOTING GUIDELINES APPENDIX C


THE INTERNATIONAL LABOR ORGANIZATION (ILO) STANDARDS The ILO was created in 1919 primarily for the purpose of adopting international standards to cope with the problem of labor conditions involving "injustice, hardship and privation". It is an independent agency of the United Nations.

The ILO’s general mandate is to promote a decent workplace for all individuals. It formulates international labor standards in the form of Conventions and Recommendations to set minimum standards and then monitors country compliance with the standards. The conventions of the ILO fall under five broad categories: freedom of association; the right to organize; collective bargaining; abolition of slave, prison, and child labor; and equality of opportunity and treatment on the basis of race, color, sex, religion, political opinion, age, nationality, or social origin.

The ILO labour standards are universal in character as their drafters intend that all countries be able to implement and ratify them, regardless of each country's stage of economic development, or social or economic system. ILO provides advisory, technical, and training services for workers, governments, and employers. Individual companies can commit to implementing the human rights and worker standards set out in the ILO principles to their own international operations, although the adoption of the principles is voluntary and is not monitored by the ILO.

The ILO has adopted more than 180 Conventions and 185 Recommendations covering a broad range of subjects. The Governing Body of the office has decided that eight Conventions should be considered fundamental to the rights of human beings at work, implemented and ratified by all member States of the organization. These are called Fundamental ILO Conventions. These rights are a precondition for all the others in that they provide for the necessary implements to strive freely for the improvement of individual and collective conditions of work. They are listed in the following: Freedom of Association

• Freedom of Association and Protection of the Right to Organize Convention, 1948 (No. 87)

• Right to Organize and Collective Bargaining Convention, 1949 (No. 98)

The Abolition of Forced Labour • Forced Labour Convention, 1930 (No. 29) • Abolition of Forced Labour Convention, 1957 (No. 105)

Equality

• Discrimination (Employment and Occupation) Convention, 1958 (No. 111) • Equal Remuneration Convention, 1951 (No. 100)

The Elimination of Child Labour

• Minimum Age Convention, 1973 (No. 138) • Worst Forms of Child Labour Convention, 1999 (No. 182)

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