SMAM Guidelines on the Exercise of Proxy Voting Rights

(1) In principle, SMAM will vote against the election of directors (including outside directors) if a company has engaged in anti-social conduct or conduct that undermines public confidence. However, even if anti-social conduct or conduct that undermines public confidence has been found, SMAM may vote for the election of directors if it has been determined that the company has taken responsibility and structures and mechanisms have been put into place to prevent a recurrence.

(2) In principle, SMAM will vote against the election of directors (including outside directors) if any of the following breaches of business performance standards applies:

However, if there is found to be a legitimate reason, SMAM will examine each proposal on an individual basis.

(3) If the ROE is lower than the listed company average (median value) or 5%, whichever is greater, for three consecutive years including the current year, appointment of directors who have held office for three years or more is opposed in principle (including external directors). However, SMAM may vote for the election of directors if there is an obvious improvement. Additionally, if it is found that there are reasonable grounds (e.g. a change in the external environment or industry-specific circumstances) or a positive equity spread, SMAM will examine each proposal on an individual basis.

(4) For a company with a nominating committee, or a company with a board of directors authorized to decide dividends from retained earnings, if a proposal concerning such dividends has not been referred to the annual general meeting and the SMAM-established dividend criteria have not been met, in principle SMAM will vote against the election of directors (including outside directors).

(5) Because a company with a nominating committee, or a company with a board of directors authorized to decide dividends from retained earnings requires a high level of accountability of its directors, SMAM will exercise special care in considering various requirements and carefully examine the election of directors.

(6) With respect to provisions (1) - (4), if SMAM determines, after examining the specific case, that the person is obviously not responsible (e.g. a new director), then SMAM will vote for the election of that person.

(7) In principle, SMAM will vote against the election of directors if the total number of directors exceeds 15 persons. If the company has not adopted an executive officer system, SMAM will make a decision based on factors such as the size of the company and how it compares to peer companies. If there are reasonable grounds, such as the nature of the business, SMAM will examine each proposal on an individual basis.

(8) If it is determined that a candidate is lacking in corporate ethics, or is conspicuously lacking in terms of qualifications or suitability, or is found to have engaged in an activity that damages enterprise value, SMAM will vote against the election of that person.

(9) In principle, SMAM will vote against the election of a particular director if the person to whom a liability limitation agreement has been attached has served as a director with representative authority or as a representative executive officer, or is found to be a person with hidden influence.

(Election of Representative Director)

(10) In principle, SMAM will vote against any proposal increasing the number of directors to a total of more than 10 directors. However, SMAM may vote for such a proposal if there are reasonable grounds, such as a company that is expanding its business operations, or a company that is transitioning from a company with a board of auditors to a company with a committee governance structure or to a company with a nominating committee. When opposing an increase in the number of directors, in principle SMAM will vote against the representative director. Even if there is a proposal to increase the number of directors, if that proposal increases the number of clearly independent outside directors or the number of directors who serve as members of the audit and supervisory committee, in principle SMAM will vote for the election of the representative director.

(11) In the case of a holding company, SMAM will strictly adhere to the number of directors irrespective of the scale of the companies under its umbrella, and may vote against the election of the representative director.

(12) There must be two or more outside directors and two or more outside auditors who satisfy the SMAM criteria for independence. If a company has one or fewer independent outside directors or one or fewer independent outside auditors, in principle SMAM will vote against the election of the representative director.

(13) In the case of parent and subsidiary listed companies, the subsidiary must have at least two or more outside directors, representing at least one-third of the total, and two or more outside auditors, representing at least one-third of the total, who satisfy the SMAM criteria for independence. If a company has one or fewer independent outside directors, representing less than one-third of the total, or one or fewer independent outside auditors, representing less than one-third of the total, in principle SMAM will vote against the election of the representative director.

(14) In principle, SMAM will vote against the election of the representative director if the number of auditors is reduced or if the number of outside auditors is reduced.

(Election of outside directors)

(15) SMAM will vote against the election of a particular outside director if that person is found to be clearly lacking in independence.

Note: The following persons will not be recognized as an “outsider with independence." (This excludes cases in which a reasonable case for independence can be made.)

(16) In principle, SMAM will vote against the reelection of a candidate whose attendance rate for board meetings is less than 80%.

(Election of directors who serve as members of the audit and supervisory committee at a company with a committee governance structure)

(17) In principle, SMAM will vote for an increase in the number of directors serving as members of the audit and supervisory committee at a company with a committee governance structure. In the absence of reasonable grounds, in principle SMAM will vote against the election of the representative director if the number of members is reduced or the number of outside directors serving as members of the audit and supervisory committee is reduced.

(18) In principle, SMAM will vote against the election of a person who has served as either a director with representative authority or as a representative executive officer to the position of director serving as a member of the audit and supervisory committee.

(1) In principle, SMAM will vote against the election of auditors (including outside auditors) if a company has engaged in anti-social conduct or conduct that undermines public confidence. However, even if anti-social conduct or conduct that undermines public confidence has been found, SMAM may vote for the election of directors if it has been determined that the company has taken responsibility and structures and mechanisms have been put into place to prevent a recurrence.

(2) With respect to provision (1), if SMAM determines, after examining the specific case, that the person is obviously not responsible (e.g. a new auditor), then SMAM will vote for the election of that person.

(3) Auditors are not held responsible for meeting the business performance standards.

(4) Increases in the number of auditors are supported in principle. If the number of auditors is less than five after a decrease and there is no rational reason, appointment of representative directors is opposed in principle.　

(5) In principle, SMAM will vote against the election of a person who has served as either a director with representative authority or as a representative executive officer to the position of auditor.

(Election of outside auditors)

(6) There must be at least two or more outside auditors who satisfy the SMAM criteria for independence. If a company has one or fewer independent outside auditors, in principle SMAM will vote against the election of the representative director.

(7) In the case of parent and subsidiary listed companies, the subsidiary must have two or more outside auditors, representing at least one-third of the total, who satisfy the SMAM criteria for independence. If a company has one or fewer independent outside auditors or the independent auditors represent less than one-third of the total, in principle SMAM will vote against the election of the representative director.

(8) In principle, SMAM will vote for an increase in the number of outside auditors. In the absence of reasonable grounds, SMAM will vote against the election of the representative director if the number is reduced.

(9) SMAM will vote against the election of a particular outside auditor if that person is found to be clearly lacking in independence.

Note: The following persons will not be recognized as an “outsider with independence." (This excludes cases in which a reasonable case for independence can be made.)

(10) In principle, SMAM will vote against the reelection of a candidate whose attendance rate for board meetings and audit committee meetings is less than 80%.

(Election of alternate auditors)

(11) SMAM determines how to vote on an alternate auditor candidate using the same criteria as the election of an auditor.

(1) If a company has engaged in anti-social conduct or conduct that undermines public confidence, in principle SMAM will vote against the proposal unless there is a reduction in the average per person payment (including outside directors). However, SMAM may vote for such a proposal if some action, such as a commensurate reduction in pay, has been taken.

(2) If the business performance standards are not met, or if there is found to be a considerable deterioration in business performance, in principle SMAM will vote against the proposal unless there is a reduction in the average per person payment.

(3) Unless there is a legitimate reason, such as an increase in the number of directors or a considerable improvement in business performance, SMAM will vote against increasing the cap on director compensation. If the cap is not reduced despite a decrease in the number of directors, SMAM will vote against the proposal unless there is a good reason.

(4) If there is a director receiving compensation of 100 million yen or more from a company that has reported a loss or is not paying dividends, and the compensation being received by that director is not commensurately reduced, in principle SMAM will vote against the proposal. If there is no compensation proposal, in principle SMAM will vote against the proposal for the election of that director. If there is no proposal for the election of that director, in principle SMAM will vote against the election of the representative director.

(1) If a company has engaged in anti-social conduct or conduct that undermines public confidence, in principle SMAM will vote against a proposal that increases the average per person payment. However, SMAM may vote for such a proposal if some action, such as a commensurate reduction in pay, has been taken.

(2) Auditors are not held responsible for meeting the business performance standards.

(3) SMAM will vote against a baseless substantial increase in compensation.

(1) SMAM will vote against such a benefit for a director (including outside director) if a company has engaged in anti-social conduct or conduct that undermines public confidence. However, SMAM may vote for such a proposal if some action, such as a commensurate reduction in pay, has been taken.

(2) If the company breaches the business performance standards, SMAM will vote against the benefit unless there is a commensurate reduction.

(3) If the payment amount is found to be excessive in light of the company's performance, SMAM will vote against the benefit.

(4) If there was a business error in the past that clearly hurt the enterprise value of the company, and the directors who were directly responsible are included, SMAM will vote against the benefit.

(5) In principle, SMAM will vote against the payment of a retirement benefit to an outside director or a director who serves as a member of the audit and supervisory committee.

(6) In principle, SMAM will vote for the payment of a retirement benefit when a director resigns and becomes an executive officer.

In principle, SMAM will vote against the payment of a retirement benefit to an auditor.

(1) In principle, SMAM will vote against such a bonus for a director (including outside director) if a company has engaged in anti-social conduct or conduct that undermines public confidence. However, SMAM may vote for such a proposal if some action, such as a commensurate reduction in pay, has been taken.

(2) If the company breaches the business performance standards, or if there is found to be a considerable deterioration in business performance, in principle SMAM will vote against such a bonus if there is no commensurate reduction.

(3) In principle, SMAM will vote against such a bonus payment to an outside director or auditor with a low attendance rate.

(1) SMAM will make an overall determination taking into account the balance between dividends and internal reserves, in light of factors such as overall return to shareholders (including stock buybacks), investment plans, financial strategy, and growth potential.

(2) In principle, SMAM will vote against any dividend that is significantly out of balance with internal reserves (e.g. paying dividends even in the face of sustained losses when a company has limited internal reserves, or paying small dividends when a company has excessive internal reserves).

(3) When the special circumstances described in (1) do not apply, in principle SMAM will vote against any dividend when the average dividend payout ratio for the last two years (including the year in question) is less than 20% and when the dividend payout ratio for the year in question is less than 20%.

(4) Similarly, in principle SMAM will vote against continuous excessive dividends (i.e. a dividend payout ratio in excess of 100%).

(1) SMAM will vote against any such proposal that is very likely to damage the enterprise value of the company.

(2) In principle, SMAM will vote against a proposal that eases the quorum requirement for special resolutions if the amendment is not clearly and reasonably explained.

(3) In principle, SMAM will vote for an amendment to the articles of incorporation that permits the board of directors to make decisions concerning company share buybacks.

(4) In principle, SMAM will vote against proposals that impose additional or more stringent conditions on the removal of directors.

(5) In principle, SMAM will vote against proposals that give the company more flexibility in setting the record date for shareholders (including deleting any current specification of the record date contained in the articles of incorporation).

(6) In principle, SMAM will vote against any excessive increase in the number of authorized shares that is not clearly explained. If a clear reason has not been given for the increase, or if the only reason that has been given is to give the company more flexibility in raising capital, in principle SMAM will vote for a resolution to increase the number of outstanding shares by up to 50%. If the company offers a detailed explanation of its takeover defense strategy, and SMAM agrees with these measures, in principle SMAM will vote for an increase in the number of outstanding shares of up to 150%, to the extent that such increase is within the scope of that found to be reasonable in accordance with the takeover defense scheme. Any amount in excess of this will require further examination. If the company foresees a specific need to raise capital for an expected need such as a planned major investment, SMAM will examine each proposal on an individual basis.

(7) Provided there is no reason to actively oppose such a proposal, in principle SMAM will vote for a proposal to reduce the specified number of directors, even if it is presumed to be a takeover defense measure.

(8) SMAM will vote against the issuance of class shares that would damage enterprise value.

(9) In principle, SMAM will vote for a proposal to authorize the board of directors to decide on dividends from retained earnings. However, if it contains a provision precluding shareholder proposals, in principle SMAM will vote against the proposal as it would make it impossible for shareholders to propose a dividend increase.

(10) In principle, SMAM will vote for liability limitation agreements for directors and auditors (including outside directors or auditors) within reasonable bounds.

(11) In principle, SMAM will vote against a liability limitation agreement for the independent auditor.

(12) In principle, SMAM will not vote against a proposal limiting the rights associated with odd lot shares.

(1) SMAM will vote against any such proposal that is very likely to damage the shareholder value, such as a transaction with a merger ratio that is clearly disadvantageous.

(2) If there has been inadequate disclosure, SMAM will vote against any such proposal unless it is very likely to increase shareholder value.

(3) Because of the conflict of interest structure between the acquirer (the management team) and the seller (existing shareholders), and the information asymmetry between the parties, any proposal for a management buyout will be individually examined, in keeping with the following:

(1) SMAM will individually examine proposals from the perspective of whether they will damage shareholder value for existing shareholders.

(2) SMAM will vote against such a proposal if the allotment price is significantly better than the market price, or if there is a problem concerning the party taking up the allotment.

(3) SMAM will vote against a proposal that results in dilution of 20% or more, unless a clear purpose and economic rationale for enhancing shareholder value is found.

SMAM will individually examine any proposal from the standpoint of whether it would damage enterprise value.

(1) In principle, SMAM will vote against grants to auditors, outside directors, directors who are members of the audit and supervisory committee, and business partners and other outsiders.

(2) SMAM will vote against stock options that would significantly dilute the equity interests of existing shareholders. In principle, SMAM will vote against a grant if it is apparent that the combined dilution of the newly granted options and the unexercised balance of existing options would be 10% or higher. In principle, SMAM will vote against a one-time grant that results in 5% or higher dilution.

(3) In principle, SMAM will vote against performance-linked (incentive) stock options with an exercise price that is set below the market price. However, if a company is introducing an equity compensation stock option plan in conjunction with the termination of a lump-sum retirement payment plan, SMAM will examine each proposal on an individual basis.

(4) In principle, SMAM will vote against a proposal to lower the exercise price for unexercised stock options.

(5) The grant of board benefit trusts or restricted stock is supported in principle if all of the following conditions are met:

(1) In principle, SMAM will vote for stock buybacks. However, depending on the company’s financial condition, SMAM may vote against such a proposal if it is found to be inappropriate.

(2) In principle, SMAM will vote against such a proposal if there is insufficient cash flow and it would cause liquidity to significantly worsen.

(3) SMAM will vote against a proposal that prioritizes the interests of specific shareholders and harms the interests of other shareholders.

(1) Essentially, each proposal is individually examined; however, SMAM will vote against any of the following types of proposals:

(2) Proposals that seek to further increase dividends in response to a company proposal will be addressed as follows:

(3) In principle, SMAM will vote for a proposal that seeks to improve disclosure, such as one requesting the disclosure of service appreciation bonuses.

(4) If a single shareholder submits an excessive number of proposals, and the proposals are clearly not for the purpose of enhancing enterprise value, and include many proposals that will hinder company management or that can be deemed to have little relevance in terms of managing the company, SMAM may vote against all of that shareholder’s proposals at once.

Proposals to transition from one governance structure (i.e. company with a board of auditors, company with a committee governance structure, or company with a nominating committee) to another will be individually examined.

(1) In principle, SMAM will vote against such a proposal.

(2) However, if it is clearly positioned as a means of countering abusive takeover tactics and the following conditions are met, SMAM may vote for such a proposal.

(3) With respect to any takeover defense measures that are not submitted to shareholders for approval, in principle SMAM will vote against the election of directors who have expressed support for such measures, including newly appointed outside directors.

(1) SMAM will vote against any proposal that is very likely to damage the enterprise value of the company.

(2) SMAM will vote against excessive cross-holdings of shares with unclear intentions in terms of management strategy.

With respect to a portfolio company with which SMAM has engaged in “deep dialogue,” depending on the content of those discussions, these decision-making standards may be applied more flexibly, and decisions will be made based on individual circumstances from a medium- to long-term point of view.

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As the Act on Investment Trusts and Investment Corporations (hereinafter “Investment Trust Act”) positions investment corporations as the “vessels” for investment and adopts externally entrusted schemes, with the authority of executive managing officers to execute business being limited to the selection of the external corporation to which to entrust operations and the convocation of investors’ meetings, the principal role of executive officers is to monitor and supervise the operations entrusted to asset management companies, etc., and these are carefully reviewed according to the following policies.

(Election of executive officers and substitute executive officers)

(1) In principle, SMAM is opposed to cases where an officer or employee of an asset management company serves concurrently as an executive officer.

(2) The following applies in cases where they do not serve concurrently.

(Election of executive managing officers and substitute supervisory officers)

(1) In principle, SMAM approves of proposals to make amendments to confirm with revisions to the Investment Trust Act, revisions to the tax system and revisions of other related legislation, and amendments that are within the scope allowed by the Investment Trust Act.

(2) In principle, SMAM opposes proposals for amendments of the certificate of incorporation other than those mentioned above that have a high probability of harming the value of J-REITs.

(Changes concerning asset management fees and addition of new management fee structures)

(3) In principle, SMAM opposes proposals to increase the total amount of asset management fees if these are not found to be reasonable after reviewing the impact on medium- to long-term value of J-REITs.

(1) Decisions are made after reviewing the grounds for dissolution and comprehensively considering the valuation of assets at the time of liquidation, residual assets for investors and the continuity of being listed.

(2) In the case of dissolution by merger, a decision is made by comprehensively reviewing the advantages and disadvantages of dissolution based on a medium- to long-term perspective as described in “5. Approval of mergers, etc.” below.

(1) When approving an agreement with a new asset management company, decisions are made on a case-by-case basis after considering the management structure and governance structure of the corporation to which operations will be entrusted, including sponsors, and also reviewing the impact on medium- to long-term value of J-REITs.

(2) Decisions are made on a case-by-case basis about the cancellation of asset management entrustment agreements by considering the background of the cancellation, and comprehensively reviewing the advantages and disadvantages of canceling the agreement as well as the advantages and disadvantages of concluding an agreement with a new asset management company.

(1) Decisions are made on a case-by-case basis by comprehensively reviewing not only the short-term effect of the merger, but also the impact on medium- to long-term value of J-REITs. Furthermore in the review of mergers, decisions are made by taking note of performance and financial indicators such as dividends per unit and the debt ratio, etc. after the merger in addition to the merger ratio.

(2) Individual decisions are made after comprehensively reviewing the advantages and disadvantages of the merger in light of the background of the merger.