A policy statement on governance.

'TIAA-CREF believes certain principles are the hallmark of an equitable and efficient corporate governance structure.'

Teachers Insurance and Annuity Association-College Retirement Equities Fund, as responsible long-term investors, recognize the overriding interest that our economy and our society have in the long-term development and vitality of our public corporations. We acknowledge that even an ideal system of corporate governance does not guarantee superior performance and, conversely, superior performance can be achieved despite a governance system that is less than perfect.

Nevertheless, TIAA-CREF believes certain principles are the hallmark of an equitable and efficient corporate governance structure. Good corporate governance must be expected to maintain an appropriate balance between the rights of shareholders -- the owners of the corporation -- and the need of management and the board to direct the corporation's affairs free from distracting short-term pressures. TIAA-CREF acknowledges a responsibility to be an advocate for improved corporate governance and performance discipline.

This statement, based on a process of our boards' Corporate Governance and Social Responsibility Committees, is offered as a basis for dialogue with senior corporate management and boards of directors with the objective of improving corporate governance practices. It represents the TIAA-CREF perspective on what we believe are important elements of good corporate governance and it identifies our voting guidelines on certain proxy issues.

Board of Directors

It is recognized that the primary responsibility of the board of directors is to foster the long-term success of the corporation consistent with its fiduciary responsibility to the shareholders. TIAA-CREF supports the primary authority of the board in such areas as the selection of the chief executive officer, review of the corporation's long-term strategy, and selection of nominees for election to the board. However, in order to sharpen the accountability of directors to shareholders, we believe:

The board should be composed of a majority of independent directors. The board committee structure should include audit, compensation, and nominating committees consisting entirely of independent directors. For this purpose independence means no present or former employment by the company or any significant financial or personal tie to the company or its management that could interfere with the director's loyalty to the shareholders. We concur in principle with the New York Stock Exchange (NYSE) definition of independence which excludes persons who act on a regular basis either individually or as a representative of an organization serving as a professional adviser, consultant, or legal counsel to the company if the relationship is considered material. The NYSE definition would not disqualify a director from independent status due to customary commercial transactions carried on at arm's length in the ordinary course of business if, in the board's discretion, the relationship would not interfere with the individual's ability to exercise independent judgment.

The board should establish a fixed retirement policy for directors and a requirement that all directors own common shares in the company. A reasonable minimum ownership interest could be defined as stock holdings equal to approximately one-half of the amount of the director's annual retainer fee.

The board should be composed of qualified individuals who reflect diversity of experience, gender, race and age. Each director should represent all shareholders; therefore, TIAA-CREF opposes the nomination of specific representational directors, and the practice of cumulative voting in the election of directors.

TIAA-CREF recognizes the responsibility of the board to organize its functions and conduct its business in the manner it deems most efficient, consistent with these or similar good guidelines. Therefore, in the absence of special circumstances, ordinarily we would not support shareholder resolutions concerning separation of the positions of CEO and Chairman, the formation of shareholder advisory committees, the requirement that candidates for the board be nominated by shareholders, shareholder mandated election of directors on an annual basis, or a requirement that directors must attend a specific percentage of board meetings, unless the board supports such measures. We are also against restricting the date of the annual meeting since it is management's prerogative to set the meeting date.

The corporation should be free to indemnify directors for legal expenses and judgments in connection with their service as directors and eliminate the directors' liability for ordinary negligence. Directors should be held liable to the corporation for violations of their fiduciary duty involving gross or sustained and repeated negligence.

The board should have a mechanism to evaluate its performance and that of individual directors. At a minimum, there should be an annual review of performance by the board that measures results against appropriate criteria defined by the board.

While TIAA-CREF normally votes for the board's nominees, we vote for alternative candidates when our analysis indicates that those candidates will better represent shareholder interests. We may also decline to vote for unopposed candidates when their record indicates that their election to the board would not be in the interest of shareholders, or when we have requested a meeting with independent directors and have been refused.

Shareholders Rights And Proxy Voting 

Unlike other groups that have dealings with the corporation -- customers, suppliers, lenders and labor -- common shareholders do not have contractual protection of their interests. They must rely on the board of directors whom they elect -- and on their right to vote on proposals the corporation is required to submit for shareholder approval. The proxy vote is thus the key mechanism by which shareholders play a role in the governance of the corporation. In exercising its votes, TIAA-CREF believes:

In order to protect the importance of the proxy vote, and to eliminate the appearance of any impropriety or unfairness, the corporation should adopt confidential voting for the election of directors and all other matters voted on by shareholders.

The board should adhere to the principle of each share of common stock having one vote and should not create multiple classes of common stock with disparate voting rights.

Any authorized but unissued shares with voting rights to be determined by the directors should not be issued without prior shareholder approval.

Equal financial treatment for all shareholders is a principle the board should adopt. TIAA-CREF supports "fair price" provisions and measures to limit the corporation's ability to buy back shares from a particular shareholder at higher-than-market prices.

TIAA-CREF supports proposals that eliminate pre-emptive rights, except where our analysis indicates that such rights have value to shareholders.

Any action that alters the fundamental relationship between shareholders and the board -- such as an "anti-takeover" measure -- should be submitted for prior shareholder approval even when it is not required by law.

Any action to adopt "super-majority" requirements that interfere with a shareholder's right to elect directors and ratify corporate actions will be opposed.

Changes in a corporation's domicile should only be proposed for valid business reasons, and not to obtain protection against unfriendly takeovers.

Corporations should opt out of coverage under state laws mandating antitakeover protection.

TIAA-CREF opposes elimination or reduction (through a change in bylaws or state of incorporation) of the shareholders' right to demand independent appraisal of the value of the holdings.

Disparate issues should not be combined and presented for a single vote. TIAA-CREF normally will vote against a package if we oppose any of its constituent parts.

Any substantial increases in the authorized number of common or preferred shares without adequate reason will be opposed.

TIAA-CREF supports equal access for large shareholders to a company's proxy statements to comment on management proposals, unless such access would impose undue costs or other burdens on the corporation.

TIAA-CREF believes that, unless state law already so provides, a corporation's charter or bylaws should provide that abstentions will not be counted as votes present when tallying shareholder votes. Abstentions, however, should still be counted for purposes of establishing a quorum.

Executive Compensation

TIAA-CREF believes a board and its compensation committee should set executive compensation levels adequate to attract and retain qualified executives. These executives should be rewarded in direct relationship to the contribution they make in maximizing shareholder wealth. A "pay for performance" system is needed to ensure equitable treatment between the shareholders and corporate management. TIAA-CREF is not equipped to evaluate thoroughly the specific issues surrounding executive compensation at each of its portfolio companies. The three key issues are:

1) Determining what constitutes "excessive" executive compensation.

2) Evaluating the soundness and reasonableness of the policies, standards, and processes for setting compensation levels.

3) Deciding what constitutes adequate disclosure of executive compensation to shareholders and the public.

With the number of firms in a large institutional investor's portfolio it is difficult for an investor to determine what constitutes "excessive" compensation without thoroughly evaluating a whole range of topics and data, to which the investor does not have ready access. Therefore, it seems more prudent for an investor to recommend policies, standards, and processes for setting executive compensation levels. These include:

Compensation should include salary and performance components.

Salary should have a defined relationship to salaries in industry peer groups.

Total compensation should be adequate to attract, motivate, and retain quality talent.

Performance measures should relate to key characteristics accepted within the particular industry to measure success. Performance should be measured over time periods adequate to assess and link actual performance with responsibilities.

Compensation should be appropriate in light of the current financial rewards to shareholders and employees.

Compensation should be determined by the compensation committee of a board and care should be taken to avoid interlocking compensation committee memberships with other boards.

Stock options and restricted stock awards should be integrated with other elements of compensation to formulate a competitive package.

The board should set forth annually in the proxy statement the criteria used to evaluate performance of the chief executive officer and other senior management. TIAA-CREF supports the spirit of the SEC rules on enhanced executive compensation disclosure and compensation committee reports to shareholders.

TIAA-CREF opposes any ban on "golden parachute" severance agreements. We abstain on resolutions calling for prior shareholder ratification of golden parachute severance agreements, but TIAA-CREF supports resolutions that call for shareholder approval of golden parachutes that exceed IRS guidelines.

Stock option, stock purchase, stock appreciation rights, savings, pensions, bonus and management incentive award proposals are scrutinized closely by TIAA-CREF. Consideration should be given to the need of the company to attract, motivate, and reward people. This must be balanced against the concerns of shareholders.

(Editor's Note: TIAA-CREF has issued guidelines for voting proxies on executive compensation issues, which are in an appendix to its corporate governance policy statement.)

CEO Performance Evaluation 

The evaluation of a corporation's chief executive officer is a critical board responsibility. A clear understanding between the board and the CEO regarding the corporation's expected performance and how that performance will be measured is very important. We believe:

A high standard of performance accountability and ethical behavior should be set at the top of the corporation.

The board should establish a specific set of performance objectives for the CEO annually. These should include concerns of shareholders, other investors, employees, customers, and the community in which the company is located. Performance objectives should include both annual and multi-year time periods.

The board should establish an annual review process that would permit it to evaluate CEO performance in executive session. A subsequent dialogue with the CEO is encouraged.

Strategic Planning 

Every company needs a strategic plan to ensure future economic success. The strategic allocation of corporate resources to each of the company's businesses is critical to its future success and to increased shareholder value needed for efficient capital formation. The board should discuss the strategic plan of each of the company's businesses at least annually. The strategic plan can be expected to include many of the following components, though TIAA-CREF recognizes that each company will need to fashion its own specific blend:

An assessment of customers, markets, and products for each business segment.

A review of the competitive strengths of the business and its position in the marketplace.

A review of human resource management issues.

A review of the technological leadership, product attributes and costs of production and/or providing the service necessary to maintain a competitive advantage.

An evaluation of the marketing and distribution channels for price and competitive superiority.

A review of the information processing technology required to provide competitive leadership.

A projection of the capital formation and financial implications of the plan.

Fiduciary Oversight

The board has a primary duty to exercise its fiduciary responsibility in the best interests of the corporation and its shareholders. This would include periodic reviews to ensure that corporate resources are used only for appropriate business purposes. To address some of the most important areas of fiduciary responsibility, the board should:

Foster and encourage a corporate environment of strong internal controls, fiscal accountability, high ethical standards and compliance with applicable laws and regulations. Develop appropriate procedures to ensure the board is advised of alleged or suspected violations of corporate standards or of non-compliance and management's resolution thereof, on a timely basis. (For example, by regular reports from the general counsel to the full board or a committee thereof.)

Appoint an audit committee composed exclusively of outside independent directors.

Appoint an independent audit firm to conduct an annual audit of the company's books and records.

Install a mechanism to review corporate policies and practices (e.g., travel and entertainment policy, executive perquisites, etc.) to ensure proper use of corporate resources.

Provide an explicit mechanism for major shareholders to communicate directly with the board (e.g., designating a non-executive chairman, a lead director, or a committee of independent directors).

Social Responsibility Issues

TIAA-CREF believes building long-term shareholder value is consistent with directors giving careful consideration to social responsibility issues and the common good of the community. The board should develop policies and practices to address the following issues:

The environmental impact of the corporation's operations and products.

Equal employment opportunities for all segments of our population.

Open channels of communication permitting employees, customers, suppliers and the community to freely express their concerns.

Effective employee training and development.

Evaluation of corporate actions that can negatively affect the common good of the community and its residents.

To prohibit deliberate and knowing exploitation of any of the non-shareholder constituencies.

Dialogue Between TIAA-CREF And Companies

TIAA-CREF believes that its policies on corporate governance should be shaped and allowed to evolve in collaboration with the companies in which it invests. Accordingly, we will take the following steps:

Provide copies of these guidelines and their updates to all domestic companies in which we invest. We will suggest that the companies distribute the guidelines to all officers and directors.

Periodically seek suggestions from these companies for ways to improve the guidelines.

Arrange for occasional informal forums for company managers, directors, and TIAA-CREF managers to review the guidelines.

Send copies of the guidelines to other large institutional investors, make them available to anybody or any organization upon request, send them to appropriate information clearing-houses, and publish them for TIAA-CREF participants and participating institutions to review and offer suggestions for change.

TIAA-CREF promulgates this statement to encourage more widespread adoption of effective corporate governance practices. We would encourage dialogue to create a better understanding of corporate governance issues with the hope these issues can be addressed and resolved in a spirit of cooperation. While this statement is intended primarily for domestic corporations, we will endeavor to apply comparable principles, as appropriate, in voting proxies on the foreign corporations in our portfolio.

Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) is the nation's largest pension system, with over $125 billion in assets. In October 1993, the organization released this Policy Statement on Corporate Governance, designed to encourage more widespread adoption of effective corporate governance practices.