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      Engagement and Proxy Voting

      Neuberger Berman believes that engagement is a dialogue between investors and companies focused on positively influencing corporate behaviors to drive long-term, sustainable returns for our clients. As a multi-asset class manager we engage with issuers across the capital structure using a range of tools and approaches guided by our Governance and Engagement Principles.
      Companies should adopt, formulate, and communicate value-enhancing long-term strategies.
      Companies should align management and board incentives with long-term shareholder goals.
      Board Independence
      Effective boards of directors must be truly independent.
      Shareholder Representation
      Companies should strive to maximize shareholder representation.
      Capital Deployment
      Companies should allocate capital to maximize long-term risk-adjusted shareholder value.
      Transparency and Communications
      Companies should provide transparency in communication and reporting.
      Risk Management
      Boards of directors should actively engage with management to evaluate and control enterprise risk.
      Environmental/Social Issues
      Companies should consider the long-term impact of their business model and operations.
      Download our Governance and Engagement Principles
      Our 2018 Inaugural Report
      Learn more about our commitment to ESG integration including recent innovations and insights.
      Engaging Fixed Income Issuers on ESG Topics
      Catalyzing change at the board level
      Giving Voice to Shareholder Concerns

      Background and Outcome: Continuity in two-year push for better governance
      In 2017, we highlighted our engagement with Nuance Communications, a mid-cap technology company, which we have owned for over five years. A pioneer in speech recognition software, Nuance appeared well-positioned for the proliferation of virtual assistants in professional and consumer applications. However, poor governance and an entrenched CEO and Board of Directors led to a failed strategy, excessive pay and a stalled CEO succession.

      When the company was not responsive to our private engagement efforts, we made our concerns public through two public letters. Our efforts were overwhelmingly endorsed by other shareholders, which delivered an unprecedented vote against the Board and governance practices at the annual shareholder meeting.

      When the Board again failed to address the rebuke from shareholders, we highlighted our concerns in another public letter. In 2018, this campaign finally led to very significant positive changes:

      • The company appointed a new CEO and removed the exiting CEO from the Board of Directors.
      • Shareholders elected seven out of nine directors, including a new, highly regarded technology CEO, who is now serving as Independent Chairman.
      • Three long-serving directors whose actions were misaligned with shareholders received poor shareholder support and were forced to resign.
      • The Board adopted bylaw changes to provide key shareholder rights we advocated for, including majority voting and a right to call a special meeting.
      • Consistent with our demands, the Board reconstituted the Compensation committee, replaced its compensation consultant, and instituted a new executive compensation plan with greater alignment between performance and pay.
      • The Board unified its separate Governance and Nominating committees into one, providing greater accountability, and re-assigned committee leadership.
      • Under the new CEO, the company announced major new strategic initiatives, including selling and spinning-off non-core businesses.

      We have continued to engage with Nuance’s management and board, both in person and on calls, and to provide a long-term investor perspective while recognizing the company’s willingness to have open and deliberative discourse with us on these matters. Particularly worth mentioning has been our ability to speak with the new Chairman and independent directors and the effort new board members have made to assure us of new standards of governance and accountability. Given time, we believe the actions from management to simplify the business while creating value for shareholders, paired with focus from the board as evidenced by the changes in shareholder rights and the compensation plan, position the company well for a successful turnaround.

      Securing private data from theft
      Data Center Operator Focuses on Security

      Background: Cybersecurity exposure in a data center
      A leading global software company planned to raise capital in the investment grade credit market to finance an acquisition. The company’s business model focuses on large data centers that store proprietary software and customer data, which we believed exposed the company to a high degree of cyber security risk.

      Despite an otherwise favorable credit profile, we were concerned about the sufficiency of the company’s data security infrastructure. A cyber security breach could result in compromised customer data—a key factor used in our ESG scoring methodology for technology companies—with the potential to create meaningful customer loss, litigation expenses and credit quality deterioration.

      Scope and Process: Validating cyber and data security best practices
      During the new issue process, we engaged with the issuer on multiple occasions, including through a group investor call and then subsequently in a direct manner with senior management. Our engagement with the issuer was focused on evaluating the company’s cyber and data security practices as critical factors in our investment decision.

      We assessed information regarding its data security investments and cyber security-specific staffing levels, among other factors. We concluded that the issuer has implemented business practices sufficient to lower the risk of potential data security breaches. For example, the issuer’s EVP of Security reports directly to the Board of Directors, which we believe demonstrates the importance of data security to the company.

      Outcome: Reassurance on security and establishment of ongoing monitoring
      Our team invested in the new issuance based on the overall strength of their credit profile and our view that management was taking appropriate steps to mitigate the data security risks we identified as part of our ESG scoring process. We intend to maintain ongoing dialogue with the issuer as we monitor the company’s data security practices going forward.

      Reversing complexity and strategic drift
      Energy Player Delivers Pipeline of Improvements

      Background: Valuable infrastructure grounded in past success
      Throughout 2018, we intensified our engagement with a large cap energy company which we have invested in since 2005. Our original investment in the company reflected our view of its irreplaceable infrastructure assets, strong returns on invested capital (ROIC) and solid execution. Over the past five years, however, these attractive characteristics began to wane and we asked management to address key governance priorities:

      • Successfully navigate a complicated regulatory environment
      • Simplify the corporate structure to better streamline execution
      • Reduce debt leverage to help lower financing costs
      • Improve communication with shareholders and provide clarity on goals

      Scope and Process: Constructive and knowledgeable dialogue
      We regularly met with both the management team and members of the board, often at our offices. The dialog centered on a presentation to management that communicated our dissatisfaction as long-term shareholders with the shift from rigorous and conservative financial management to more aggressive guidance and capital deployment. We explained that the complex corporate structure made cash flow analysis challenging, which hurt investor perceptions of asset quality.

      These issues distracted investor attention from recent improvements in safety and community relations. Following an oil spill several years ago, the company significantly increased spending on maintenance and safety, instituted more inspections, drills and training programs, and linked employee and executive compensation to safety outcomes. Understanding that stakeholder support affects regulatory approval, the company cultivates comprehensive outreach programs to indigenous groups and local communities. We felt that simplifying the business would make these programs easier to administer and more visible to investors.

      Outcome: Swift simplification and improvement in execution
      Following our engagement, the board rapidly laid out a more return-focused strategy, returned to a simpler corporate structure with fewer subsidiaries, and improved credit quality through asset sales. The company also improved its investor communications, with ESG disclosures that tell a story of learning from past missteps and rigorously assessing environmental impact. Stock ownership incentives helped align company leadership with its shareholders.

      Excessive pricing in healthcare services
      Healthcare Company Relies Too Heavily on Price

      Background: In context of pending LBO, vulnerable sources of growth
      With intensified focus on reducing healthcare costs for society at large, we expect that companies in the healthcare sector to have difficulty raising prices to the extent they have historically. The growth of revenue and earnings over time will increasingly rely on volume growth and innovative solutions to improve the lives of patients. We undertook due diligence of this healthcare issuer in the context of a leveraged buyout financing syndication process.

      Scope and Process: Evaluating future pricing dynamics and growth sustainability
      This healthcare issuer had historically grown revenues through significant price increases. We assessed the likelihood that past aggressive pricing activities might negatively impact the future financial outlook through reduced volume growth, heightened regulatory scrutiny or over-reliance on pricing to grow cash flows. Our engagement aimed to determine if the issuer had plans to normalize its pricing practices in the future and if business planning took into account the impact of large price increases on society. Discussions with senior executives, the financial sponsors purchasing the company and regulatory experts helped identify that there was no plan in place to normalize aggressive pricing activities. It seems patients, even those with insurance coverage, were often left with large payment obligations that did not take into account their ability to pay. We concluded that the historical rate of pricing growth was not sustainable going forward due to its negative impact on patients and the cost to insurance providers.

      Outcome: Credit protection through avoidance
      We avoided investing in the issuer’s Senior Unsecured Notes and exited the Senior Secured Term Loan near par due to the concerns that we identified surrounding aggressive pricing activities. The issuer has subsequently experienced credit deterioration driven by several factors, one of which we believe is negative volume trends, potentially driven by above-market pricing, and increased media and regulatory scrutiny on their sector.

      Bond and Loan Price Over Time

      Source: BlackRock Aladdin. Data as of December 31, 2018.

      Animal welfare
      Addressing Farm Animal Welfare Risks

      Background: U.S. grocery giant embraces organic and fresh foods
      A technologically savvy grocery retailer in the U.S. uses industry-leading data analytics and advanced supply chain systems to bring fresh, natural and organic foods to the masses at affordable prices. In 2018, its organic produce business exceeded $1 billion in sales, making it a key player in the organic food market, which in the U.S. in 2017 reached $45.2 billion in sales, equivalent to 5.5% of food sold in retail channels.1 One of the company’s brands, which represents products that are free from 101 artificial ingredients, generates over $2 billion in annual revenues. The company has also become an emerging leader in the transition toward online ordering and grocery delivery, positioning it for potential share gains in a highly fragmented industry.

      As the largest grocer in the U.S., the company has exposure to livestock factory farming, which is prone to adverse environmental outcomes tied to climate change, water scarcity and water pollution. In fact, the livestock sector contributes to 14% of global greenhouse gas emissions—more than the transport sector.2 Related social impacts include the health implications of antibiotic overuse, pandemic contagion risk and reputational damage tied to changing consumer attitudes around animal welfare.

      Scope and Process: Focus on environmental and animal welfare risks at factory farms
      We seek to invest in and engage with companies that are proactively addressing supply chain risks and opportunities, as illustrated by our Interaction with Kroger touching on factory farming and animal welfare within the grocery supply chain. Since 2017, we have regularly communicated with the company by email, conference call and in person.

      In 2018, Neuberger Berman participated in a collaborative letter-writing campaign through the Farm Animal Investment Risk and Return (FAIRR) initiative. This campaign targeted public disclosure of efforts related to alternative protein offerings, two-degree climate scenario analysis and overall sustainability strategy. Our due diligence included meetings with grocery competitors, suppliers and non-governmental organizations (NGOs).

      Outcome: Enhanced disclosure and a more sustainable supply chain
      FAIRR now recognizes the company for its proactive approach to sustainability. The company identified objectives to address the risks and opportunities in its agricultural supply chain. For example, it put in place a goal to source 100% cage-free eggs by 2025, up from 21% today as suppliers make them available. The company is also engaging its suppliers on reducing antibiotics across all proteins (poultry, beef and pork) and eventually transitioning to low or no antibiotics proteins while also offering alternative plant-based proteins in their stores.

      1Organic Trade Association (OTA), 2018 Organic Industry Survey conducted 1/25/2018 – 3/26/2018.

      2Food and Agriculture Organization (FAO), 2016 Global Livestock Assessment Model (GLEAM).

      Fighting for the bondholder
      Aircraft Leaser Improves Board Independence

      Background: Fundamentally sound; concerns about indebtedness of key equity owner
      A diversified financial issuer with a focus on global aircraft leasing became a first-time issuer in the high yield and leveraged loan markets during 2017. The issuer benefits from economies of scale, moderate debt levels and positive industry growth trends. Despite these fundamental strengths, media attention surrounding the leveraged balance sheet of a key equity owner heightened investor concerns that value would be extracted to the detriment of creditors due to the company’s governance and ownership structure.

      Scope and Process: focus on transparency and covenant protections
      From the time of the company’s issuance, our interactions with the issuer were frequent: 15+ points of contact with various members of its leadership team (CEO, CFO, investor relations). We zeroed in on ways to strengthen the existing separation framework from the key equity owner and reinforce the company’s independent governance structure. We encouraged management to commit to and maintain a transparent capital allocation policy, reinforced by the addition of structural covenant protections for creditors.

      Outcome: Credit-enhancing covenant protections
      The issuer voluntarily instituted credit-enhancing covenant protections during February 2018 that included the addition of restricted payment protections. Our engagement with the issuer continued as we believed the company’s ownership and governance structure still hindered its ability to achieve its credit rating goals. The issuer subsequently diversified its equity owner base in a credit-enhancing manner and enhanced its board structure so that no material shareholder undertaking could be implemented without the approval of a second large equity owner. The market and rating agencies viewed these actions favorably, which drove spread tightening across the structure. These governance enhancements may ultimately drive a move from high yield ratings to investment grade.

      Issuer Spread to Worst Over Time

      Source: BlackRock Aladdin. Data as of December 31, 2018

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      Proxy Voting

      One important way in which we exercise engagement is voting proxies on behalf of our clients for whom we have voting authority. We do this in order to fulfill our fiduciary responsibility to protect our clients’ best interests and as an important component of our approach to creating shareholder value. Our Governance and Proxy Committee oversees our Proxy Voting Policy and proxy voting process and ensures no conflicts of interest. We have provided guidelines, procedures and records to emphasize our transparency in proxy voting to clients.

      Meetings voted
      As in prior years, a steady growth in the number of meetings voted on behalf of our clients has continued. Further diversified developed markets and new strategies in the international space contributed to this growth, which was distributed across all regions. The year 2018 marks the first time that a majority of the meetings voted were not North American.

      2018 Meetings Voted by Region and Percentage Increase Since 2017

      Source: Neuberger Berman.

      Voting statistics

      When considering proxy votes, we acknowledge the information asymmetry between shareholders and insiders, and begin with the assumption that management and the board are carrying out their duties faithfully. That does not mean however, that we are shy about voicing our concerns through engagement and voting. We find ourselves opposing many proposals that are either unclear in their alignment with shareholder interests or at odds with our judgment of the best course for the company. This is reflected in both the 89% of management proposals that we supported in the last year and the 11% we opposed.1 Some of the main areas of opposition involved management compensation and share issuance.

      In 2018, we significantly increased our support for shareholder resolutions, of which we voted for a majority (52%) for the first time. Our support reflects increasingly narrow and carefully-worded proposals that make reasonable requests on issues material to shareholders. In the past, more resolutions tended to represent special interests or social activism. We think the improved quality of shareholder resolutions is being shaped by the SEC submission process and by greater collaboration with investors.

      1Data for the calendar year 2018.

      Management and Shareholder Proposal Vote Distribution for 2018

      Source: Neuberger Berman. Data for the calendar year 2018.

      Our commitment to engagement and good governance extends across our investment platform.

      We are signatories and active supporters of stewardship codes across multiple geographies:

      U.S. Investor Stewardship Group
      Neuberger Berman is a signatory to the Investor Stewardship Group (ISG), a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts. The ISG was formed to bring all types of investors together to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct. www.isgframework.org
      UK Stewardship Code
      Neuberger Berman subscribes to and is a signatory of the UK Stewardship Code published by FRC. We believe that good stewardship and responsible investment will provide our clients with better long term investment performance, thus enhancing the value that accrues to the ultimate beneficiary. www.frc.org.uk
      Japan Stewardship Code
      Neuberger Berman welcomed and accepted the Principles for Responsible Institutional Investors “Japan’s Stewardship Code” in 2011. We continue to support the work of the Japan FSA to promote sustainable growth through dialogue between investors and management. www.fsa.go.jp
      EU Shareholder Rights Directive
      Neuberger Berman is reviewing the Shareholder Rights Directive ((EU) 2017/828) under the FCA’s policy statement PS19/13 and will provide an update if any changes are required in relation to existing policies regarding shareholder engagement already in place.
      Industry Collaboration and Leadership
      We work with like-minded institutions to advance the integration of environmental, social and governance factors across markets.

      This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. The firm, its employees and advisory clients may hold positions of companies within sectors discussed. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Investing entails risks, including possible loss of principal. Diversification does not guarantee profit or protect against loss in declining markets. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

      This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.

      The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.