Why Corporate Governance Matters Mark Zinkula, CEO Legal & General Investment Management

LGIM is a major index investor Index investing does NOT mean being a passive shareholder Index managers need to be active shareholders – selling a poorly performing company is not an option Index managers are long-term investors with a vested interest in the success of the companies they invest in Corporate Governance a major source of added value Internal £84.7bn External £591.5bn Source: LGIM - data total assets as at 30 September 2014. Notes: Passive includes all Passive assets but excludes Passive LDI and Passive Multi Asset. Active includes all active assets but excludes Active LDI and Active Multi Asset. Solutions include LDI (Passive and Active), Multi Asset (Passive and Active) and Overlay assets. All Overlay assets are included in the Solutions category. We have large index assets But we actively manage them The purpose is to add financial value for our clients’ assets

What is Corporate Governance? Protect your money Engage and vote on poorly governed companies Align your interests Your companies; your shares Keep management focused on the long term Align incentives Maximise your long-term returns Appoint the best management teams Extract best shareholder value Promote industry best practice This is everyone’s stewardship responsibility We are meant to protect and voice opinions on behalf of our clients

Good governance enhances shareholder value Index assets ideal for raising long- term performance across the market Professor Kay: “Passive Managers should recognise a special responsibility to improve the performance of the index they track” “...no doubt LGIM takes corporate engagement seriously” Raising the overall index performance (beta) Focusing on one company (alpha) It’s not just about stock picking, when you own the whole market It’s about raising the bar. For the benefit of everyone.

Expanding our influence Environment Governance Social Financial Pushing Governance improvements outside of the UK Meaningful dialogue with companies on anything that impacts long-term financial returns We don’t just do ‘passive voting’ everywhere We don’t only operate where we own 4% and have clout with companies We push for market changes (stewardship/governance code In Japan) Participate in collective voices – stock exchanges, listing authorities etc in Asia Important as our clients assets diversify and increase exposure to EM etc.. ESG – importance of environmental and social impacts How companies manage pollution/resources/human capital/corruption/supply chain are all financially material issues Integrating also into the active fundamental analysis process **********explanation/examples********** Example of talking to Yahoo/Google/Apple on governance Participate in consultations for the Hong Kong / Moscow Stock Exchange

LGIM: Three areas of distinction Managing conflicts of interest Joining forces through collaboration Committed to communicate Will focus on THREE differentiators Legal & General Investment Management

Non-Executive Directors 1. Managing conflicts “Conflict of interest is the cancer of corporate governance” Bob Monks Conflicts with active fund managers Conflicts with clients Conflicts with parent company LGIM CEO Fund Management Teams Corporate Governance Team Non-Executive Directors Independent views and actions Managing conflicts is VITAL There are many levels to consider Director of Corporate Governance sits on the board. **********explanation/examples********** Bob Monks is a US activist investor who founded Institutional Shared Services…

1. Managing conflicts M&A – looking after interests of both entities AstraZeneca (UK) – bid by Pfizer Failed to reach a common ground on valuation AstraZeneca has set a future sales target to be achieved from its current pharmaceutical pipeline We are actively pushing to link pay to the sales targets Each fund manger has a view on this stock But index manager means we own both ends of M&A We do what’s best for clients who own both Chinese wall / separate reporting line, ensures interests not eroded *********explanation/examples********** AstraZeneca (UK) – bid by Pfizer (US) Failed to reach a common ground on valuation due to the risks and uncertainties of completing the deal AstraZeneca has set a future sales target to be achieved from its current pharmaceutical pipeline and we will monitor their performance to achieve this goal We are actively pushing the company to link pay to the sales targets that they set out in their defence document Time Warner inc. (US) – bid by 21st Century Fox inc. (US) Voting shares being exchanged for non-voting shares; poor governance structures and regulatory focus and challenges were the main concerns highlighted. Plan to announce strategy for the business in the Autumn 2014

shared business interests 1. Managing conflicts shared business interests Barclays Bank 2011 results: “unacceptable” by CEO We voted against Remuneration Report (2012,2014) Chairman of Remuneration Committee (2012) Continued dialogue on a range of issues: CEO, CFO and Chairman succession LIBOR litigation Helping to change their remuneration The Salz Review – helping improve culture We Don’t Abstain Many business interests can compromise judgement in AMs Strong internal governance key to uphold stance Voting against is actually rare in the market We DID and continue dialogue with company

Practising what we preach 1. Managing conflicts Practising what we preach Governance structure  Executive pay  Tax disclosure  Global Compact  Living wage employer  ESG in L&G Pension Scheme  Focus on diversity  L&G LGIM I Corporate Governance We look hard at what we do internally Provides us with credibility in engagement Makes L&G a better company in the process *********explanation/examples********** Global compact - United Nations defined basic environmental and social standards (10 principles) for companies to comply with . We signed up in 2013, before we start to engage with investee companies. (can add others)

Leading and joining forces 2. Collaboration Investor Forum Global investor network Board diversity Executive pay Improving IPO process Japan – independent directors Climate Change policies Auditor independence Engagement effective through formal and informal channels We are open to collaborate and make change (we cant do it alone) *********explanation/examples********** UN-sponsored PRI (Principles for Responsible Investment) The 30% Club, which is lobbying for FTSE 100 companies to have 25% women on the board by the end of 2015 Will add ACGA / IIGCC an CG33/QV18143 CORPGOV_2013_03

2. Collaboration Audit Growing coalition of long-term investors working together for a more independent audit process Held a meeting with EU Commissioner Barnier on ways to improve the audit market EU law, Reform of the EU statutory Audit market, April, 2014  10 year mandatory rotation with option to extend by 10 more years Making meaningful impacts: BG Group, Aviva, Land Securities and Hargreaves Lansdown changing their auditors HSBC, Henderson Group and Unilever set to change in 2014 “Any reputable company should review their audit arrangements regularly. The contribution and objectivity of an external auditor must surely reduce with time and familiarity, however good they are. That is just common sense” Ian Gorham, CEO, Hargreaves Lansdown Average auditor tenure for FTSE100 companies had been 48 years Question of ‘independence’

Diversity leads to better performance 2. Collaboration Diversity leads to better performance Experience Age Skills Nationality/culture Gender “The key to business success is innovation and the key to innovation is diversity of thinking. (Boardroom) diversity alone does not guarantee innovation, but it increases the possibility” Arnold Donald, CEO, Carnival, September 2013 Diversity is key to healthy debate – to build a strong strategy Status quo needs to be challenged to survive in the future *********explanation/examples********** Quote comes from Arnold Donald, CEO of Carnival Group Key topic of engagement during company meetings Headhunters - engage with them to widen the talent pool Regulators - EU consultation; EU quota; narrative reporting Industry level - talking to proxy advisors (ISS, ABI) Collaboration with other investors - FTSE 250 companies Consulting with Lord Davies and Vince Cable on policies to promote diversity Speak publicly in UK and US on what LGIM is doing We sit on the L&G Plc Equality, Diversity and Inclusion Committee and the L&G Plc Female Talent Forum

3. Communication Keeping clients informed Quarterly reports Annual report Thought pieces Trustee meetings Trustee education Seminar on active ownership All this doesn’t matter if our clients are not informed Many opportunities to find out about CG or what LGIM does *********explanation/examples********** Neutral CG education Trustee education Seminar about active ownership with clients Speaking events etc LGIM reporting - large numbers of clients are now asking about our activities

The Stewardship Disclosure Framework – how did LGIM do? 3. Communication The Stewardship Disclosure Framework – how did LGIM do? Public transparency Stewardship policy disclosure A Voting disclosure B Voting disclosure timing Engagement reporting Independent assurance Managing conflicts Policy Disclosure Monitoring engagement and escalation Engagement approach We vote on over 95% of shares (by market cap) Haven't abstained for 3 years Significant resources (8 people) allocated to stewardship Full commitment to transparency Our stewardship is externally audited Signed up to this Disclsoure Framework on Day 1 Our annual report was positively received, but we continuously look for feedback and look to improve But we are always looking for feedback from clients and looking to improve

Summary Good governance enhances shareholder value Every member has a voice LGIM Using size to maximise clients’ rights Bring change through collaboration Committed to transparency We do this because it makes financial sense for our clients’ assets Index doesn’t mean passive We use size and access to voice everyone’s rights

Legal & General Investment Management does not provide advice on the suitability of its products or services This document is intended for educational purposes and should not be relied on for any other reason Legal & General Investment Management Authorised and regulated by the Financial Conduct Authority One Coleman Street London EC2R 5AA LEGAL & GENERAL INVESTMENT MANAGEMENT