Responsible ShareholdersAnnual review to 31 December 2012 of corporate governance and responsible investment activities at UBS Global Asset Management

For professional clients only

“It is the responsibility of the shareholders, and particularly of the main institutions among them, to assure themselves that the companies in which they have invested other people’s money are headed by effective boards and to hold them to account for their performance. It is the responsibility of chairmen to ensure that their boards match up to the legitimate expectations of their shareholders.”

From “Corporate Governance and Chairmanship” by Sir Adrian Cadbury

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This is the tenth annual review we have produced on our governance and responsible investment activities. While corporate governance has increasingly moved to the forefront for our clients in those ten years, our core principles directing our responsible investment activities have not changed. We place a great deal of emphasis on voting and engaging with the boards of companies in which we invest. In 2012 we voted at 5,945 company meetings across 50 countries. We vote at all applicable meetings globally unless there are barriers that could interfere with the management of our portfolios. The annual shareholder meeting gives us the opportunity to send a message to boards about any concerns that we may have. However, our commitment to engaging with companies on governance issues on behalf of our clients goes beyond just a once a year vote. We engage regularly with companies throughout the year. It can be difficult to judge the effectiveness of a board from outside the boardroom. And as the financial crisis has demonstrated, simply complying with a governance code does not necessarily constitute good governance. So to help us understand the company better we meet with board members, typically the chairman or Head of the Remuneration Committee. At these meetings we discuss the issues that are most relevant at the time and can have the greatest impact on the long-term success of the company. These include:

•Strategy – including acquisitions and the deployment of capital

•Operational performance

•Quality of the board

•Succession planning

•Health and safety

•Risk management

•Remuneration

We believe this engagement produces benefits for both the board and for our clients. We consider that it is helpful for chairmen to hear an informed outside perspective on the company, especially as it comes to them directly rather than through advisers. We can raise any issues that may concern us and the chairman can do the same. There is the opportunity to discuss any issue candidly knowing that the conversation will remain confidential. Often the topic of discussion is not an issue that we can directly vote on but it builds the two-way dialogue and helps us make assessments of the effectiveness of the board.

We understand that it is extremely demanding to run a board successfully and we do not underestimate the challenges involved. The chairman is key to assembling a suitably balanced board in terms of skills, experience, independence and knowledge of the company. Another important characteristic of a board is its diversity of thought – not just gender – so that it avoids “groupthink”. The most important issues that we judge boards on are set out below: 1. The ability to allocate capital wellIt is clear from an analysis of our own engagement activity over the last ten years that this is the topic that has generated the most intense discussions with boards. This is not entirely surprising given the impact that acquisitions can have on the sustained profitability of a company and therefore the profound consequences not just for shareholders but for other stakeholders such as employees and governments (through tax revenues). Increasingly we are focusing on the “outputs” of governance, with capital allocation as a main focus. This ties in well with the Kay Report into the effectiveness of the UK equity market, which suggests that asset managers focus more on the strategy of the company when engaging with boards. 2. Succession planningEffective succession planning for both the non-executives and executives on the board helps enormously in promoting the longer-term sustainability of the business. Chairmen are often looking three to five years ahead as part of this process. The importance of succession planning in ensuring the long-term success of the business is often overlooked. 3. An enlightened view of shareholder valueThe board must evaluate the risk environment that the business operates in and must determine the extent of its appetite for risk exposure in pursuing its strategic objectives. We expect this evaluation to include risks that may impact the long-term value created for shareholders. For example we would expect the board to take account of health and safety, carbon intensity and water usage. The idea that companies should be run with the aim of long-term value creation for shareholders is often called the enlightened view of shareholder value. 4. ReputationWe look to the board to maintain and enhance the reputation of the company. In sharp focus at the moment is the banking industry which, following the financial crisis, is faced with the challenge of rebuilding trust and reputation. For example, during 2012, Barclays announced an independent review of

Introduction

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its business practices. The board (which has a new Chairman and new CEO) undertook to comply with whatever the review recommends. The terms of reference for the review are quite explicit about the scale of the problem:

“The culture of the banking industry overall, and that of Barclays within it, needs to evolve. A number of events during and after the financial crisis demonstrated that banks need to revisit fundamentally the basis on which they operate, and how they add value to society. Trust has been decimated and needs to be rebuilt.” 5. RemunerationFor many years we have taken a close interest in executive remuneration structures, as remuneration gives us a useful window into the boardroom. We look for remuneration structures to be simple, aligned with strategy and to require a high level of personal shareholding to ensure alignment of interest with shareholders. During 2012 we voted against supporting 383 remuneration reports globally. The two main reasons for which we did not support these reports were if executive pay was not sufficiently aligned with performance or if there was a lack of disclosure.

Ian PitfieldCorporate Governance Director

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At UBS Global Asset Management, we aim to be supportive, long-term shareholders. We seek to develop both a long-term relationship and an understanding of mutual objectives and concerns with the companies in which we invest on behalf of our clients. We do this through regular meetings. These meetings are held between our investment team of analysts and portfolio managers and, typically, the company’s chief executive and finance director. In any given year we would normally expect to have around 7,000 such meetings globally. In addition we also meet with chairmen and other board members.

These meetings enable us to have discussions with company management about corporate strategy and objectives and to make an assessment of management performance. They also allow us to monitor a particular company’s development over time and assess progress against our expectations as investors. They give us an opportunity to outline what our expectations are and to explain our views on important issues.

If a company consistently fails to meet our expectations, we may seek to institute a change in company strategy and, as an ultimate sanction, in the management. In the first instance, this is likely to be through discussions with the chairman or other senior non-executives.

We regard any such action, however, as representing a breakdown in our longer-term relationship with the company. We are only likely to pursue this course when the company’s performance has been extremely poor or the board has consistently ignored what we believe to be the legitimate concerns of shareholders. We acknowledge that such direct intervention is invariably high profile and runs the risk of adverse publicity which may aggravate the situation. We endeavour at all times to keep these discussions and actions confidential.

Active in corporate governanceOur approach to corporate governance is an active one and is integral to our investment process. It involves:

•Building relationships through regular company meetings

•Discussions with boards and in particular with the chairmen

•Voting on all resolutions globally, where practical, in line with clients’ statements of investment principles

•Working with other shareholders where appropriate

•Reporting to clients

We pride ourselves on putting clients at the heart of everything we do and it is clearly in their best interests for us to exercise our stewardship responsibilities.

Governance and investment teams working togetherThe governance issues facing shareholders are becoming more complex, and an effective response requires

governance and investment teams to work together. If simply considering how to vote on an issue of principle such as majority voting or takeover protection then a governance view may be sufficient. However, in order to have constructive engagement with boards on more complex issues such as strategy, our governance and investment teams cooperate closely.

UBS Global Asset Management views voting and engagement as another tool in our investment approach. The governance team is headed by an experienced former portfolio manager and sits with our portfolio managers and analysts. As a result, continuous dialogue takes place with our investment teams concerning aspects of governance. Our voting is managed and controlled in-house by this dedicated team.

Collaborative approachAs a general rule we believe the effectiveness of engagement is considerably increased when we find common ground with other shareholders. We are thus willing to work with collective bodies or collaborate with other shareholders if we believe this will increase the chance of success.

At UBS Global Asset Management, we are particularly keen to engage early with companies in order to minimise loss of shareholder value. As our governance and investment teams are joined up, we are well placed to identify issues early.

We are a member of the ABI Investment Committee and also the Conference Board’s Council on Corporate Governance, which brings together asset managers and companies for constructive debate.

In addition to being a signatory to the United Nations Principles for Responsible Investment, we are one of the original signatories (in 2002) to the Carbon Disclosure Project, a member of the International Corporate Governance Network (ICGN) and a signatory to the Extractive Industries Transparency Initiative (EITI). Further, our specialist Sustainable and Responsible Investments (SRI) team participates in international working groups including the UN Global Compact Report: Who cares wins, EUROSIF, Forum Nachhaltige Geldanlagen (Germany) and Association for Sustainable & Responsible Investment in Asia (ASrIA). We are also a founding partner of the Global Initiative for Sustainability Ratings.

Voting globallyWe vote globally so long as there is no conflict with the efficient management of client portfolios. There are a number of local practices that impede our ability to vote, such as share blocking in Belgium and share re-registration in Norway. These practices may restrict the ability of the asset manager to settle trades between the date the vote is lodged and the annual meeting. Many countries are improving

Overview

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their practices and enabling easier voting by non-resident investors, however there is still some way to go. We support all such improvements and keep a close eye on market developments in this area.

Our voting in 2012In the year to 31 December 2012 we voted at 5,945 company meetings globally on a total of 59,179 separate resolutions. We declined to support management on 3,677 or some 6% of these resolutions.

The meetings* we voted at break down by region as follows:

For details on all our voting records, please see our website: www.ubs.com/globalam-responsible

In order for UBS Global Asset Management to fulfil its obligations as a responsible shareholder it is essential that we have access to accurate information regarding companies in which we invest, including the approach to corporate governance adopted by the company. Taking into account the number of companies in which we invest across global markets, we consider it efficient to retain the services of a specialist provider experienced in obtaining information regarding shareholder meetings held by listed companies. Such providers are able to supply the agenda of meetings and the current and historical background to each item to be voted upon.

The vendor we have chosen to partner with for this service – ISS Governance Services – has both the long-term experience and global coverage for the securities held by UBS Global Asset Management, together with a secure internet-based platform for providing information and research.

Using the services of a vendor means we are able to focus our resources on determining what is in our clients’ best interests when deciding how to vote and to engage effectively with companies. We retain full discretion when determining how to vote our clients’ shares. We do not outsource any decisions to a third party.

Examples of issues where we have voted against management are shown below. There are different issues in each region, reflecting the variations in governance practices and shareholder rights. In the case of the US, all examples are of shareholder resolutions that we have supported and represent votes against management.

UK and Europe•Proposalstointroduce‘poisonpills’(anti-takeover

mechanisms)

•Executiveremunerationstructurewhereitisinsufficiently aligned with shareholders’ interests

•Mergersoracquisitionsthatwejudgenottobeinshareholders’ interests

US•ProposalstoseparatetherolesofchairmanandCEO

•Tosubmit‘poisonpills’toashareholdervote

•Torequiretheelectionofdirectorstobesubjecttoamajority vote

Asia•Proposalstointroduce‘poisonpills’(anti-takeover

mechanisms)

•Wide-rangingauthoritytoissueshareswithoutpre-emption rights (i.e. not offering them to existing shareholders)

•Executiveremunerationstructurewhereitisinsufficiently aligned with shareholders’ interests

Japan•Electionofstatutoryauditorswedonotregardas

sufficiently independent of the company.

Region Meetings

Australasia 345

Japan 702

Asia (ex-Australasia and Japan) 987

Europe ex-UK 1,006

UK 841

North America 1,622

Other 442

TOTAL 5,945

*This refers only to meetings voted in line with our house policy

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Reasons we voted against management in 2012

Discussions with companiesIn addition to voting, we engaged with companies through meetings with chairmen and non-executive directors and also had discussions about proposed executive remuneration schemes.

We judge companies not only on the traditional governance inputs (such as board structures) but also the outputs of governance such as acquisitions and operational performance. If a company fails to meet our expectations, we may engage with the board. The importance of the holding to our clients will be taken into account.

We regard an effective chairman as key to an effective board and so particularly value these meetings with chairmen.

Remuneration schemesFor many years we have taken a close interest in executive remuneration structures, as remuneration gives us a useful ‘window’intotheboardroom.Wediscussedremunerationstructures with a number of companies ahead of a formal proposal being made to shareholders. This gave us the opportunity to suggest improvements to these structures while at the draft stage, for example, making performance hurdles more demanding. We worked with other investors to update the ABI Principles of Remuneration which were published in November 2012 and represent a key shareholder guide for remuneration committees.

We generally support executive incentive schemes that show a clear link between company performance and the level of remuneration, and additionally:

•Require a high level of personal shareholding to ensure alignment of interest with shareholders

•Encourage a long-term perspective – with the measurement period for the long-term bonus element to be at least three years and then executives encouraged to hold shares for a further period

•Are simple – with preferably only one long-term element

•Are designed to promote sustainable value creation in line with the agreed strategy of the company

•We favour, as one of the performance hurdles, total shareholder return (TSR) relative to either a peer group or index. Below-median performance should not be rewarded. Full vesting should require upper-quartile performance. We dislikeperformancehurdlesbasedsolelyonfinancialoraccounting ratios, such as growth in earnings per share

•Avoid excessive issuance

Poorly-structured schemes may include insufficiently demanding hurdles (especially where linked to earnings per share rather than increased shareholder value) or unclear performance hurdles. We do not support one-off bonuses that are not related to company performance, such as for simply completing a transaction.

Issuing of shares and related matters 1274

Board related issues 1220

Acceptance of remuneration plans / reports 383

Stock plans (e.g. Executive and Staff Related Incentive Schemes) 208

Lack of details on proposals 195

General business matters 192

Proposals to split role of chair / CEO 72

Takeover defence plans (poison pills) 68

Proposals for rights to call special meetings or act by written consent 37

Takeovers and disposals 28

Issuing of shares and related matters 1274

Board related issues 1220

Acceptance of remuneration plans / reports 383

Stock plans (e.g. Executive and Staff Related Incentive Schemes) 208

Lack of details on proposals 195

General business matters 192

Proposals to split role of chair / CEO 72

Takeover defence plans (poison pills) 68

Proposals for rights to call special meetings or act by written consent 37

Takeovers and disposals 28

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These principles describe the approach of our Equities, Fixed Income and Global Investment Solutions investment areas to corporate governance and to the exercise of voting rights on behalf of our clients (which include funds, individuals, pension schemes and all other advisory clients). They also apply to the listed real estate securities held within the Global Real Estate investment area.

Where clients of UBS Global Asset Management have delegated the discretion to exercise the voting rights for shares they beneficially own, UBS Global Asset Management has a fiduciary duty to vote shares in the clients’ best interest. These principles set forth our approach to corporate governance and to the exercise of voting rights when clients have delegated their voting rights to us.

Our global corporate governance principles reflect our active investment style and structure that provides us with detailed knowledge of the investments we make on behalf of our clients. With that detailed knowledge, we always seek to judge what is in the best interests of our clients as the beneficial owners of those investments.

We believe voting rights have economic value and should be treated accordingly. Where we have been given the discretion to vote on behalf of our clients, we will exercise our delegated fiduciary responsibility by voting in a manner we believe will most favourably impact the economic value of their investments.

Good corporate governance should, in the long term, lead towards both better corporate performance and improved shareholder value. Thus, we expect board members of companies in which we have invested to act in the service of the shareholders, view themselves as stewards of the company, exercise good judgment and practise diligent oversight of the management of the company. A commitment to acting in as transparent a manner as possible is fundamental to good governance.

In serving the interests of our clients, some investment capabilities within UBS Global Asset Management may at times pursue differing approaches towards particular corporate governance issues, including how to vote or abstain on proposals. This reflects the diverse nature of our capabilities. However, in all cases the interests of clients will be paramount. Underlying our voting and corporate governance principles we have two fundamental objectives:

1. We seek to act in the best financial interests of our clients to enhance the long-term value of their investments

2. As an investment advisor, we have a strong commercial interest that companies in which we invest on behalf of our clients are successful. We promote best practice in the boardroom

To achieve these objectives, we have established a set of principles to guide our exercise of voting rights and the taking of other appropriate actions, and to support and encourage sound corporate governance practice. These principles are applied globally but also permit us the discretion to reflect local laws or standards where appropriate.

While there is no absolute set of standards that determine appropriate governance under all circumstances and no set of values will guarantee ethical board behaviour, there are certain principles which provide evidence of good corporate governance. We will, therefore, generally exercise voting rights on behalf of clients in accordance with the following principles.

Board structureSignificant factors for an effective board structure include the following:

•Aneffectivechairmaniskey

•Therolesofchairmanandchiefexecutive generally should be separate

•Theboardshouldbecomprisedof individuals with appropriate and diverse experience capable of providing good judgment

and diligent oversight of the management of the company

•Thenon-executivedirectorsshouldprovide a challenging but generally supportive environment for the executive directors

Board responsibilitiesFor effective discharge of board responsibilities:

•Thewholeboardshouldbefullyinvolved in endorsing strategy and in all major strategic decisions (e.g. mergers and acquisitions)

•Theboardshouldensurethatatalltimes:

– appropriate management succession plans are in place

– the interests of executives and shareholders are aligned

– the financial audit is independent and accurate

– the brand and reputation of the company is protected and enhanced

– a constructive dialogue with shareholders is encouraged

– it receives all the information necessary to hold management to account

Areas of focusAreas of concern related to our corporate governance focus include the following:

•Economicvalueresultingfromacquisitions or disposals

•Operationalperformance

•Qualityofmanagement

•Independentnon-executivedirectorsnot holding executive management to account

•Qualityofinternalcontrols

•Lackoftransparency

•Inadequatesuccessionplanning

•Poorapproachtocorporatesocialresponsibility

•Inefficientmanagementstructure

•Corporateactivitydesignedtofrustrate the ability of shareholders to hold the board to account or realise the maximum value of their investment

Our global corporate governance principles

UBS Global Asset Management (UK) Ltd21 Lombard StreetLondon EC3V 9AHTel. +44-(0)20-7901 5000Fax +44-(0)20-7929 0487www.ubs.com

This document is for Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances. This document does not replace portfolio and fund-specific materials. Commentary is at a macro or strategy level and is not with reference to any registered or other mutual fund. This document outlines our general policies on the issues discussed. These may be subject to change according to specific circumstances. This document is issued by UBS Global Asset Management (UK) Ltd and is intended for limited distribution to the clients and associates of UBS Global Asset Management. Use or distribution by any other person is prohibited. Copying any part of this publication without the written permission of UBS Global Asset Management is prohibited. Care has been taken to ensure the accuracy of its content, but no responsibility is accepted for any errors or omissions herein. This document is a marketing communication. Any market or investment views expressed are not intended to be investment research. The document has not been prepared in line with the requirements of any jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this document does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The opinions expressed are those of UBS Global Asset Management and are subject to change without notice. Furthermore, these views are not intended to predict or guarantee the future performance of any individual security, asset class, markets generally, nor are they intended to predict the future performance of any UBS Global Asset Management account, portfolio or fund. UBS Global Asset Management (UK) Ltd is a subsidiary of UBS AG. Registered in England and authorised and regulated by the Financial Services Authority: UBS Global Asset Management (UK) Ltd, UBS Global Asset Management Funds Ltd, UBS Global Asset Management Life Ltd. Telephone calls may be recorded. Services to US clients for any strategy herein are provided by UBS Global Asset Management (Americas) Inc. UBS Global Asset Management (Americas) Inc. is registered as an investment adviser with the US Securities and Exchange Commission («SEC») under the Investment Advisers Act of 1940.© UBS 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Issued in March 2013.

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ScopeUBS Global Asset Management is a large-scale asset manager, providing traditional, alternative, real estate, infrastructure and private equity investment solutions to private clients, financial intermediaries and institutional investors worldwide. With six investment areas and a range of strategies within each area, the approach to ESG issues necessarily varies across the firm and, to some extent, across countries/regions according to local market customs and client needs.

This document focuses on our approach utilised for the overwhelming bulk of our traditional equity capabilities. Our general approach described here is subject always to any client-specific instructions or restrictions and/or following any local laws or standards applicable in the domiciles of assets or funds.

For further information on our policies and activities, please contact:

Ian PitfieldCorporate Governance DirectorUBS Global Asset Management+44-(0)20-7901 5367ian.pitfield@ubs.com