2016 Corporate Governance Report

“Effective corporate governance means caring for our clients’ future by empowering the companies in which we invest to create sustainable long-term value”.

Sacha Sadan - Director of Corporate Governance

Active ownership

Our clients trust us to manage, safeguard and help grow the value of their assets and effective corporate governance can help us achieve this. We take this responsibility seriously and devote significant resources to this effort. We report on our actions for clients and this is a summary version of the full 2016 report.

Positive engagement to enhance long-term value

WHAT WE DO

We use our scale and influence to

ensure that companies integrate

material environmental, social

and governance (ESG) factors

into their everyday thinking,

in order to develop resilient

strategies, think longer-term and

consider all of their stakeholders.

We also encourage markets

and regulators to create an

environment in which good

management of ESG factors is

valued and supported. This helps

to protect and enhance long-term

prospects for our clients.

ACTIVE ENGAGEMENT IN 2016

500

293

47%

39%

23%

meetings held

Companies met

Companies based outside of the UK

UK companies voted against (at least one resolution)

Meeting discussing environmental and social issues

UK board directors voted against: 89

TOP FIVE THEMES DISCUSSED IN

OUR 500 COMPANY MEETINGS

1. Board composition, e.g.

diversity, board refreshment,

quality, skills

2. Remuneration

3. Strategy

4. Nomination and succession

5. Climate change

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2016 Corporate Governance Report

IMPROVING BOARD EFFECTIVENESS

Management matters

Board composition and quality are critical elements of

company success – it was the top theme in our company

meetings in 2016. We continued to drive meaningful change

over the year, to ensure that directors with the right skills

are contributing to board discussions and that their actions

are aligned with shareholder interests.

We hosted a seminar for new and existing non-executive

directors (NEDs), established guiding principles for external

board evaluations, and engaged with 50 companies on the

issue of diversity, including voting against 12 Chairmen at

UK companies for poor board diversity.

We also published a thought piece on US board tenure

and set out voting guidance on the topic. LGIM worked

with Zygos, an executive search consultant, to produce a

comprehensive guide on the evolving role of the Senior

Independent Director (SID).

Our independent Corporate Governance team covered a wide range of initiatives in 2016. Among many other things we have been vocal on the importance of cyber security, preventing food waste, and promoted best practices on reducing short-term reporting and executive pay.

Our work is truly global in nature, spanning everything from child labour and

human rights risks related to cobalt production in the Democratic Republic of Congo

(DRC), to climate change disclosure among US oil and gas companies, and board

composition and board independence issues in Japan. We are highly active, and

haven’t abstained when voting in the last five years in the UK.

Wells Fargo & Co

There were three key areas of focus in the year:

Board accountability/diversity Climate changeExecutive remuneration

When Wells Fargo was implicated in an internal cross-selling scandal involving 1.5 million fraudulent customer accounts, the board clawed back $40 million from the CEO’s pay but he remained in office. Our engagement contributed to an outcome which included the Chair/CEO stepping down from the company, followed by

separate CEO and Chair appointments.

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2016 Corporate Governance Report

EXECUTIVE REMUNERATION

Reducing the pay and performance gaps

LGIM wants companies to improve the link between pay

and long-term performance.

We published “Mind the Gap”

to increase awareness around

the increasing inequality of pay

between executives and the wider

workforce, and the negative

knock-on effects for businesses

and for society. This was

followed up with an opinion

piece in the Financial Times.

We asked companies to publish the pay ratio

between the median employee and the CEO and to

explain the difference when compared with competitors.

CLIMATE CHANGE

It’s in our hands

2016 saw governments across the world commit to

keeping the global average temperature rise below 2°C,

as part of the historic Paris Agreement in November.

All companies, whether they emit carbon or not, need

financing. They require banks, pension funds and

insurance companies to buy their shares and debt. This

is where LGIM can have a real impact.

Our new Climate Impact Pledge details LGIM’s

commitment towards engaging with the largest

companies who hold the key to a low-carbon future. For

those who do not meet the required standard over time,

this means voting against the Chairman and, where

possible, divesting.

We also held our first Climate Change Seminar in

May, alongside several client and consultant meetings

to explain how energy transition can be addressed in

investment portfolios.

In 2016, 59% of shareholders, including LGIM, voted against BP’s remuneration report due to concerns regarding annual bonuses and the granting of maximum Long-Term Incentive Plan (LTIP) awards. We met BP five times prior to the AGM, and have since met the company three times to discuss remuneration policy and structures. Engagement is ongoing, but has already led to positive change.

BP

October 2016 Mind the gap!

Follow us @LGIM #Fundamentals

F U N D A M E N TA L S

In this edition of Fundamentals, Angeli Benham, Corporate

Governance Manager at LGIM, discusses the implications of

increased executive pay and what investors can do to help

align it with the interests of all stakeholders.

Mind the gap!High pay does not always guarantee

performance.Total pay for executive

directors, and particularly chief executives (CEOs), has increased sharply over the past decade. When

compared to the performance of the

market, the increasing level of executive

pay is becoming difficult to justify.

The disparity between pay for chief executives and their

employees has widened significantly in recent years.

Research by the High Pay Centre shows that earnings

for FTSE 100 CEOs increased by 146% from 2000 to

2013, compared with only 43% for all FTSE 100 full-time

employees.

Evidence on whether increasing pay leads to improvements

in performance is mixed. For example, research by

Professor Dan Ariely of Duke University has shown that

variable pay, such as bonuses, can substantially improve

performance on routine tasks. However, for people working

on innovation, creative and non-routine tasks, such as

executive directors, variable pay can hurt performance.

We believe that the inequality faced by many employees

has a material impact on society. This inequality, and the

furore that surrounds executive pay, can no longer be

ignored.

Legal & General Investment Management (LGIM)

supports the idea that companies which demonstrate

good long-term performance should be able to reward

their executive management team. However, we believe

that continuously increasing their pay is neither beneficial

to shareholders nor to society at large.Companies should not forget that workers are their

most valuable asset and success would not be delivered

without their effort. Companies that are exercising

restraint, cutting costs and headcount should be

sensitive if they are also increasing executive pay. All

employees, regardless of the health of the company,

should be recognised for their contribution to the

success of the business.

We also distributed our revised pay principles to the

UK’s largest 350 listed companies, taking a stronger line

on using annual bonuses to incentivise performance.

LGIM will vote against remuneration committee chairs

where we feel they are not taking sufficient control over

executive pay, and we did so 18 times in 2016.

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2016 Corporate Governance Report

CONTACT US

For further information on anything you have read in this report or to provide feedback, please contact us at

corporategovernance@lgim.com. Please visit our website www.lgim.com/corporategovernance where you will

also find more information including frequently asked questions.

Important Notice

The information presented in this document (the “Information”) is for information purposes only. The Information is provided “as is” and “as available” and is used at the recipient’s own risk. Under no circumstances should the Information be construed as: (i) legal or investment advice; (ii) an endorsement or recommendation to investment in a financial product or service; or (iii) an offer to sell, or a solicitation of an offer to purchase, any securities or other financial instruments.

Unless otherwise stated, the source of all information is Legal & General Investment Management Ltd.

LGIM, its associates, subsidiaries and group undertakings (collectively, “Legal & General”) makes no representation or warranty, express or implied, in connection with the Information and, in particular, regarding its completeness, accuracy, adequacy, suitability or reliability.

To the extent permitted by law, Legal & General shall have no liability to any recipient of this document for any costs, losses, liabilities or expenses arising in any manner out of or in connection with the Information. Without limiting the generality of the foregoing, and to the extent permitted by law, Legal & General shall not be liable for any loss whether direct, indirect, incidental, special or consequential howsoever caused and on any theory of liability, whether in contract or tort (including negligence) or otherwise, even if Legal & General had be advised of the possibility of such loss.

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Issued by Legal & General Investment Management Ltd. Registered in England No.02091894. Registered office:

One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority.

M1348

“If I can leave you with one thought around these ESG issues, it is that they are a part of long-term risk management and therefore a fundamental part of clients’ fiduciary duty.”

Sacha Sadan - LGIM Director of Corporate Governance

We have a large, independent team reporting directly

to LGIM’s CEO and a Corporate Governance Committee,

which includes two non-executive directors. The team’s

structure has been designed to reduce potential conflicts

of interest, with a framework focused on achieving the

best outcome for our clients.

THE FULL REPORT

To read more about

LGIM’s engagement

activity in 2016,

including many more

examples of where

we have helped

deliver long-term

positive change,

please see the

full version of

this report by

clicking here and

also by visiting our website:

www.lgim.com/activeowner

2016 Corporate Governance Report

Active ownership means using our scale

and influence to bring about real, positive

change to create sustainable investor

value. Our Annual Governance Report

explains how we achieved this in 2016.

Active ownershipPositive engagement to enhance long-term value

Delivering the best outcome for our clients