Principles of Internal Governance and Asset Stewardship

1. Organizational and Investment Approach

About MFS

MFS International Australia Pty Ltd (MFS Australia) (AFSL 485343, ABN 68 607 579 537) is a member of the MFS Investment Management group of companies (MFS or us or we). Established in 1924, MFS is an active, global asset manager with investment offices in Boston, Hong Kong, London, Mexico City, São Paulo, Singapore, Sydney, Tokyo and Toronto. MFS is a member of the Sun Life Financial group of companies. 

Our clients appoint us as fiduciaries to help them achieve their investment objectives over the long term. Generally, our clients’ objective is to maximize the financial return of their portfolio within appropriate risk parameters. To help our clients achieve this objective, we employ an investment approach that generally focuses on companies with durable, long-term competitive advantages and attributes from which value can be created over a full market cycle. Our fully integrated global research platform is the foundation of our investment process. We analyze opportunities across geographies, across fundamental and quantitative disciplines and across each organization’s entire capital structure to develop a fuller perspective on each security. Our investment professionals work out of nine major financial centers around the world, and their efforts are fully integrated through their work on eight global sector teams. The sector teams comprise fundamental equity analysts who cover similar industries around the world. Quantitative analysts, credit analysts and portfolio managers also belong to the teams to broaden and deepen their perspective. We believe using a collaborative global structure to share and integrate information builds better insights for our clients. Further detail on our corporate background, investment approach, key management and investment personnel within MFS is available on our website. 

In addition, because we believe that certain environmental, social and corporate governance (ESG) issues may impact the long-term value of businesses, we integrate them into our investment process and our ownership practices to the extent that the integration of such factors is consistent with our fiduciary duty to help our clients achieve their investment objectives and protect their economic interests. Our investment team includes a Chief Sustainability Officer and dedicated analysts with ESG expertise who assist the investment team in evaluating ESG- related issues. To oversee the integration of ESG issues into our investment process and our ownership practices, we established  a sustainability strategy and governance structure that is designed to provide for effective integration of sustainability across MFS. 

The MFS Sustainability Executive Group provides strategic leadership concerning MFS’ sustainability strategy. It includes our chair and CEO, president, CIO, CSO, general counsel and other senior leaders responsible for the integration of sustainability across the firm.  The Investment Sustainability Committee is accountable for ensuring the investment team is properly integrating ESG factors into its research and engagement activities. The MFS Proxy Voting Committee (which includes senior personnel from MFS’ Investment, Legal and Global Investment Support departments) oversees the adoption and administration of the MFS Proxy Voting Policies and Procedures as well as our proxy voting activities. The Corporate Sustainability Committee coordinates corporate sustainability efforts and is accountable for determining and implementing MFS' ESG client and corporate strategies and policies related to the consistency of interactions with clients on sustainability issues.

Conflicts of Interest

Generally, MFS has adopted policies and procedures that address and mitigate the types of conflicts of interest that arise in the ordinary course of providing services to our clients. These policies specify how and when proprietary accounts are traded in relation to client accounts, how trades are allocated, how shares are voted, use of soft dollars, personal trading and similar matters. Various functional committees are responsible for approving general policies applicable to providing services to clients and ensuring provisions within those policies to address conflicts of a systemic nature. We continuously monitor changes to our business that could give rise to new conflicts of interest and revise our policies, procedures and disclosures to address and mitigate those conflicts, as deemed appropriate. 

For further detail in relation to the internal governance structure regarding these general policies (including conflicts of interest), see Section 2. 

For further detail in relation to proxy voting and how we manage potential, material conflicts of interest, see Section 3.

2. Internal Governance

Corporate Governance and Committee Structure

MFS’ senior leadership comprises the MFS Management Committee, which has the authority to carry out all matters relating to the oversight of MFS. The MFS Management Committee is responsible for setting the firm’s strategic direction, determining the annual operating and capital budgets, establishing priorities for key investments in the business, recommending major policy decisions to the company’s board of directors, developing new projects, and performing corporate planning for MFS and its subsidiaries. The MFS Management Committee generally meets bi-weekly to discuss strategic issues and oversees three major supervisory committees that perform policy governance functions and oversee related regulatory and risk management activities:

• Internal Compliance Controls Committee (ICCC): reviews compliance and regulatory issues across each of MFS’ businesses, evaluates solutions to those issues, and oversees implementation of those solutions. The ICCC is chaired by MFS’ chief compliance officer and the members of the MFS Management Committee generally comprise its members.
• Enterprise Risk Management Committee (ERMC): provides a company-wide forum to review significant enterprise risks and to monitor and advise business units concerning MFS’ internal control systems and adherence to MFS’ risk appetite and tolerance. The ERMC is chaired by MFS’ chief enterprise risk officer, and its members comprise certain MFS Management Committee members and other senior leaders representing each of MFS’ major business areas.
  
• Investment Management Committee (IMC): responsible for the management of investment personnel; the oversight of portfolio management, research and trading; the establishment and monitoring of investment policies/procedures; and the monitoring and management of investment risk. The IMC is chaired by MFS’ chief investment risk officer, and its membership comprises certain MFS Management Committee members and other senior leaders from MFS’ investment management area.

These major supervisory committees and the functional subcommittees, which report directly to them, comprise MFS employees who have experience in the specialty area of each committee. Each functional committee or subcommittee attempts to resolve issues brought to its attention. Significant decisions made by the functional subcommittees and major supervisory committees are escalated through the committee structure, as appropriate, ensuring that all material compliance matters are reported to MFS’ senior management.

Policies and Policy Review

As mentioned in Section 1, MFS has adopted general policies and procedures that address and mitigate the types of conflicts of interest that arise in the ordinary course of providing services to our clients. These general policies cover a number of areas and specify how and when proprietary accounts are traded in relation to client accounts, how trades are allocated, how shares are voted, personal trading, and similar matters. 

MFS has a Policy Governance Framework that requires policies to be reviewed by their owner at least annually to determine if revisions or updates are necessary to respond to developments of a business, operational, legal, or regulatory nature. Owners and their designees may seek the assistance of other departments, including Legal and Compliance, to assist them in this review. 

Changes to policies are reviewed and approved by the appropriate oversight committee and are disseminated to the organization where necessary. Policies are ratified on a quarterly basis by the MFS Internal Compliance Controls Committee. Certain policies must be approved by the appropriate fund’s board of trustees or the MFS board of directors. Policy changes are also communicated upon request to our clients. 

In addition to this process, the Legal and Compliance departments monitor regulatory developments and work with business units to revise or implement new policies and procedures to reflect any new or changed rules or any other regulatory developments. MFS also monitors changes to its business environment that may affect its policies and procedures. 

Oversight of the general policies and related conflicts of interest is performed through the MFS Committee Governance structure, a hierarchy of supervisory committees, which includes the MFS Internal Compliance Controls Committee, MFS Enterprise Risk Management Committee, and MFS Investment Management Committee (as described earlier in this section). The MFS Committee Governance structure oversees compliance activities, risk management functions, investment management and operational processes. Supporting these supervisory committees is a group of key business process/functional committees designed to offer a forum for the communication of all issues that arise with respect to the committee’s charter, including conflicts of interest. 

Additionally, we maintain an organizational structure that further mitigates the potential for conflicts through the following:

• segregation of duties;
• establishment of ethical walls and other informational barriers, where appropriate; and
• independence of compliance, risk and internal audit functions.

3. Asset Stewardship

General Approach to Asset Stewardship

In the ordinary course of our research process, our investment team raises issues, including those related to ESG topics, during meetings with management of investee companies and prospective investee companies when we believe the discussion can enhance our understanding of the company’s practices and goals to enhance shareholder value. The analysis and ongoing monitoring is undertaken by the MFS analyst responsible for covering the investee company in collaboration with MFS portfolio decision makers and other investment analysts (e.g. ESG and quantitative analysts). Our dedicated ESG investment personnel will also often highlight particular ESG-related issues that members of our equity investment team can incorporate into their discussion with management teams. Examples of potential engagement topics include: (i) corporate governance matters, including the level of independence of the board, shareholder-friendly orientation of managers and executive compensation; (ii) labor relations and worker safety; (iii) environmental stewardship and related safety controls and risk management; and (iv) interactions with local people groups, governments, and non-governmental organizations.

As part of our stewardship responsibilities, we vote proxies in what we believe to be in the best, long-term economic interest of shareholders. We believe open communication with our portfolio companies on proxy voting issues is an important aspect of our stewardship responsibilities. As such, members of our proxy voting team will engage with a company or another shareholder when we believe that the engagement will enhance our understanding of certain matters on the company’s proxy statement. Some of the issues we discuss with companies are: executive compensation, director accountability, and shareholder proposals on various ESG issues. We may also engage with a company in advance of its formal proxy solicitation to discuss our thoughts on certain contemplated proposals.

Monitoring and Engagement Activities

The monitoring of investee companies is undertaken by members of both our investment team and our Proxy Voting team. Members of our investment team analyze factors such as company's earnings, balance sheet, cash flows, competitive position and management ability. In addition, the investment team regularly meets with company management, as well as suppliers, competitors, consultants and industry contacts in order to develop a comprehensive view of each company they follow. Because we believe that ESG issues often impact the long-term value of businesses, ESG topics are also often discussed at these meetings. In order to aid the investment team in their analysis and monitoring of critical issues, our dedicated ESG investment personnel assist members of the equity investment team in the evaluation of ESG-related issues. In addition, we obtain third party research with respect to ESG issues. 

Likewise, members of our proxy voting team will also engage with a company or another shareholder when we believe that the engagement will enhance our understanding of certain matters on the company’s proxy statement. Some of the issues we discuss with companies are: executive compensation, director accountability, corporate culture, compliance with applicable corporate governance codes, and shareholder proposals on various ESG issues. We may also engage with a company in advance of its formal proxy solicitation to discuss our thoughts on certain contemplated proposals.

In addition to engaging individually with our portfolio companies, MFS also believes that collective and other forms of engagement can be beneficial as well. We often engage with sponsors of shareholder initiatives or proposals, which helps inform our views on important proxy voting issues. We participate in various industry working groups and industry organizations that seek to develop thought leadership on emerging proxy voting issues. MFS may send letters to various regulatory agencies to encourage corporate governance reform when we feel it is warranted. For example, MFS is a signatory to the Principles for Responsible Investment.

Proxy Voting Activities

We have adopted a clear and robust policy on voting securities owned by our clients for which we have been delegated voting authority. We vote proxies in what we believe to be in the best, long-term economic interest of shareholders. The exercise of voting rights is overseen by our Proxy Voting Committee (which includes senior personnel from the Investment and Legal teams), and we have adopted proxy voting policies and procedures with respect to our exercise of voting rights. Our proxy voting policies and procedures describe situations where we may vote against directors and management recommendations. We seek to vote all shares held by our clients, with the exception of certain cross-border voting impediments such as “share-blocking” requirements. We have entered into an agreement with a third party to perform various proxy voting related administrative services. We also receive third party reports and vote recommendations for all investee companies, which may help us identify (i) potentially excessive executive compensation practices, (ii) environmental and social shareholder proposals that may warrant support, and (iii) general best practices within certain markets, including certain aspects of applicable corporate governance codes. However, we analyze such issues independently and do not necessarily vote with the third party recommendations on these issues. We may also use other research tools in order to identify the circumstances described above. 

Our proxy voting policies and procedures further include a description of how we manage potential, material conflicts of interest in regards to proxy voting at investee companies. Our policy is that proxy voting decisions are made in what we believe to be in the best long-term economic interests of our clients, and not in the interests of any other party or in our corporate interests. If a member of the Proxy Voting Committee or any other employee involved in a voting decision identifies a personal interest with respect to such voting decision, then he or she must recuse himself or herself from participating in the voting process. Furthermore, the Proxy Voting Committee does not include individuals whose job responsibilities primarily include client relationship management, marketing or sales. Additionally, in cases where we (i) consider overriding a specific guideline in our proxy voting policies or procedures, (ii) consider a matter that is not governed by a specific guideline in our policies, (iii) evaluate a potential case of excessive executive compensation issue related to the election of directors or advisory pay vote, or (iv) consider a matter that requires consultation with our investment team, we will check to see whether the matter involves an issuer that has a significant relationship with Massachusetts Financial Services Company and its subsidiaries (collectively, MFS). Where we identify such a significant relationship the Proxy Voting Committee will carefully evaluate the proposed vote to ensure that the proxy is ultimately voted in what we believe to be the best long-term economic interests of our clients and not in our corporate interests and then report the matter to the MFS Conflicts Officer. 

For a copy of our proxy voting policies and procedures, please visit www.mfs.com.

Reporting

Clients who have delegated us with proxy voting authority can receive a vote summary report of their portfolio. MFS publicly discloses its firm-wide proxy voting records. A global analysis of MFS’ Proxy Voting practices, including how certain votes were cast in various regions for the most recently completed proxy voting year (1 July to 30 June) is included in the MFS Annual Sustainability Report (which is published annually during the first or second quarter). More information about our Proxy Voting activities is available in the proxy voting section of www.mfs.com. An in-depth perspective on our sustainable investing activities for the most recent calendar year is available on the “Sustainable Investing” section on www.mfs.com. Please see the MFS Annual Sustainability Report for more information on our stewardship and voting activities. We also report on responsible investing efforts as required by any collaborative body or organization that we join.

For clients wishing to discuss MFS Australia’s commitment to the FSC Standard, please contact your client service representative.

For media inquiries wishing to discuss MFS Australia’s activities under the FSC Standard, please contact:

Daniel Flaherty
Senior Public Relations Manager
MFS Investment Management
111 Huntington Avenue
Boston MA 02199-7618
U.S.A.
Telephone: 1-617-954-4256
Email: dflaherty@mfs.com

Issued in Australia by MFS International Australia Pty Ltd (“MFS Australia”) (ABN 68 607 579 537). MFS Australia holds an Australian financial services licence number 485343 and is regulated by the Australian Securities and Investments Commission. MFS Australia is a member of the Financial Services Council (“FSC”). 

This material is directed at investment professionals for general information use only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. Any securities and/or sectors mentioned herein are for illustration purposes and should not be construed as a recommendation for investment. Investment involves risk. Past performance is not indicative of future performance. The information contained herein may not be copied, reproduced or redistributed without the express consent of MFS Investment Management (“MFS”). While the information is believed to be accurate, it may be subject to change without notice. MFS does not warrant or represent that it is free from errors or omissions or that the information is suitable for any particular person’s intended use. Except in so far as any liability under any law cannot be excluded, MFS does not accept liability for any inaccuracy or for the investment decisions or any other actions taken by any person on the basis of the material included. MFS does not authorise distribution to retail investors. 

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