Northeast Investors Growth Fund
Proxy Policy

Proxy Voting Record

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Proxy Votes

Northeast Investors Growth Fund (“NEIG” or the “Fund”) is managed with one overriding goal: to provide the greatest possible total return to shareholders consistent with governing laws and the investment policies delineated in the Fund. In pursuit of this goal, NEIG exercises its rights as shareholder to support what it believes is sound corporate governance within companies in which the Fund invests. Because NEIG’s sole interest is protecting its investors’ and Fund’s assets, when it takes action it places its investors’ interests and rights as shareholders first. The only reason the Fund acquires and holds a company’s equity security is NEIG’s expectation that it will prove to be a good investment. NEIG’s consideration of proxy issues, therefore, is focused on the investment implications of each issue.

In this context, NEIG has always exercised its rights as shareholder by actively voting on proposals that portfolio companies offer in their annual proxy statements. NEIG believes that its proxy review process, which has been in place for many years, is both thorough and objective, as is consistent with NEIG’s fiduciary obligations to its shareholders.

The exercise of shareholder rights is generally done by casting votes by proxy for shareholder meetings on matters submitted to shareholders for approval, for example, the election of directors or the approval of a company’s stock option plans for officers or other employees. At NEIG these written guidelines have been established for proxy voting by the Board of Trustees of NEIG. The purpose of these guidelines is simple: to promote the accountability of a company’s management and board of directors to its shareholders; to align the interests of management with those of shareholders; and to increase disclosure of a company’s business and operations.

NEIG believes sound corporate governance should be directed towards achieving three primary objectives:

  1. Accountability. There must be effective means in place to hold those entrusted with running a company’s business accountable for their actions. Management of a company must be accountable to its board of directors; the board, in turn, must be accountable to shareholders, who are the company’s owners. Promoting accountability can take many forms. These include enforcing rules and laws imposing duties on officers and directors; protecting shareholder voting rights; ensuring rigorous scrutiny of a company’s financial statements by independent, outside auditors; and maintaining free and open markets to allow for the re-allocation of capital and transfer of corporate control.
  2. Alignment of Management and Shareholder Interests. The interests of a company’s management and board of directors should be aligned as much as possible with the interests of the company’s shareholders. This means, for example, that salary and equity-based forms of compensation paid to management should be designed to reward management for doing a good job of creating value for the shareholders of the company.
  3. Effective Disclosure. The third objective is to promote timely disclosure of important information about a company’s business operations and financial performance. This is intended to enable investors, individual and institutional alike, to make informed decisions on when to buy, sell or hold a company’s securities.

To promote these objectives, these specific voting guidelines have been established by the Board of Trustees of the Fund, after consultation with management. (The Proxy Voting Guidelines are reviewed periodically by management, the Trustees of the Fund (including the Independent Trustees) and, accordingly, are subject to change).

The guidelines recognize that a company’s management is entrusted with the day-to-day operations of the company, as well as longer term strategic planning, subject to the oversight of the company’s board of directors. The guidelines also recognize that the company’s shareholders – the owners of the company – must have final say over how management and directors are performing, and how shareholders’ rights and ownership interests are handled.

Northeast Investors Growth Fund proxy voting guidelines generally address proposals submitted to shareholders of six types:

  1. Proposals seeking approval of equity-based compensation, including stock option plans
  2. Proposals relating to changes in corporate control
  3. Proposals that affect shareholder rights, including voting rights
  4. Proposals for the election of directors
  5. Proposals relating to social and corporate responsibility issues
  6. Proposals for the approval of independent auditors

Proxy Voting Guidelines

Equity-based Compensation Plans

Approval of Plans or Plan Amendments
In general, the Fund opposes stock-related compensation unless it is a reasonably designed plan that aligns the interests of corporate management with those of shareholders by providing officers and employees with an incentive to increase shareholder value. While the Fund evaluates plans on a case-by-case basis, it generally will withhold its vote for plans or plan amendments that do not meet the following conditions:

  • The dilution effect of new shares authorized, plus the shares reserved for issuance in connection with all other stock related plans, should not exceed 15%. However, for companies with a smaller market capitalization, the dilution effect should not exceed 10%. If the plan does not meet this test, the dilution effect is also evaluated in light of any unusual factor involving the company.
  • The minimum exercise price of stock options should be no less than 100% of fair market value on the date of grant.
  • Neither the Board of Directors nor its Compensation Committee should be authorized to amend materially a plan without shareholder approval.
  • The granting of awards to non-employee directors should not be subject to management discretion, but rather should be pursuant to non-discretionary grants specified by the plan’s terms.
  • The plan should not authorize the re-pricing of stock options (including the cancellation and exchange of options) without shareholder approval.
  • The restriction period for restricted stock awards (RSAs) normally should be at least three years. RSAs with a restriction period of less than three years, but at least one year, might be acceptable if the RSA is performance based.
  • Stock awards other than stock options and RSAs should be identified as being granted to officers/directors in lieu of salary or cash bonus, and the number of shares awarded should be reasonable.
  • Where management already has substantial holdings, no further options should be granted.
Re-pricing of Outstanding Options

The Fund generally will withhold its authority on the election of directors if, within the most recent year and without shareholder approval, a company’s Board of Directors or its Compensation Committee has re-priced certain outstanding options held by officers or directors exceeding certain percentages depending on the size of the company.

Expensing of Stock Options

The Fund will vote in favor of proposals for the expensing of stock options.

Corporate Control

NEIG generally opposes measures that are designed to prevent or obstruct corporate takeovers. Such measures tend to entrench current management. In the free capital markets system, the active trading of a company’s securities and the potential transfer of corporate control through takeover – hostile or otherwise – must be permitted to occur.

Shareholder Rights Plans
NEIG recognizes that there are arguments both in favor of and against shareholder rights plans, also known as poison pills because they can prevent someone from buying more than a certain percent of a company’s stock without management approval. NEIG believes the best approach is for the company to put its case to shareholders by letting them vote on a plan. NEIG generally responds to the adoption or extension of a shareholder rights plan in accordance with the following guidelines:

  • If, without shareholder approval, a company’s Board of Directors has instituted a new poison pill plan, extended an existing plan, or adopted a new plan upon the expiration of an existing plan during the last year, we generally withhold votes on the election of directors at the Annual Meeting following such action.
  • NEIG may vote in favor of a rights plan with “sunset” provisions: if the plan is linked to a business strategy that will – in its view – likely result in greater value for shareholders, if the term is less than five years, and if shareholder approval is required to reinstate the expired plan or adopt a new plan at the end of this term.
  • NEIG generally supports shareholder resolutions requesting that shareholders be given the opportunity to vote on the adoption of rights plans.

Increases in Authorized Common Stock
The Fund will generally approve of increases in authorized shares, provided that the increase is not greater than three times the number of shares outstanding and reserved for issuance. In calculating shares outstanding and those reserved for future issuance, the guidelines take into account shares reserved for stock-related plans and securities convertible into common stock, but not shares reserved for any poison pill plan.

“Blank Check” Preferred Stock
The Fund will generally vote against proposals to authorize preferred stock the voting, conversion, dividend and other rights of which are determined at the discretion of the Board of Directors when the stock is issued. Although so-called “blank check” preferred stock typically is used for legitimate financing needs, it also can be issued in an anti-takeover situation. To protect Fund shareholders, while still providing financing flexibility to management, NEIG generally votes in favor of the authorization of preferred stock if the company’s Board of Directors specifically agrees to the following provisions:

  • The voting rights of a series of preferred stock are limited to one vote per share; and
  • The preferred stock will not be issued in an anti-takeover situation unless shareholders have approved the issuance in advance.

Classified Boards
The guidelines view the election of a company’s Board of Directors as one of the most fundamental rights held by shareholders of the company. Because a classified board structure prevents shareholders from electing a full slate of directors at Annual Meetings, NEIG will generally vote against classified boards unless a company’s charter or governing corporate law allows shareholders, by written consent, to remove a majority of directors at any time, with or without cause.

Shareholder Rights

NEIG views the exercise of shareholders’ rights – including the rights to act by written consent, to call special meetings and to remove directors – to be fundamental to corporate governance.

Cumulative Voting
The ability of shareholders to cumulate their votes for the election of directors – that is, cast more than one vote for a director about whom they feel strongly – generally increases shareholders’ rights to effect change in the management of a corporation. Therefore, the Fund generally supports proposals to adopt cumulative voting. However, where the rights of the shareholder are protected by an entirely independent Nominating Committee and a majority of the Board of Directors is independent, NEIG may abstain on a shareholder proposal to adopt cumulative voting.

Confidential Voting
The Fund generally supports proposals to require that voting be confidential because they increase the independence of shareholders who are voting. In some cases, no votes may affect stock prices, and while that may be unavoidable, confidential voting tends to minimize this problem. Confidential voting also allows shareholders, particularly employee shareholders, to vote their shares without concern that management may try to exert influence on their right to vote.

Supermajority Voting
NEIG favors simple majority votes by shareholders on matters submitted for their approval and generally will call for support of shareholder proposals that eliminate supermajority-voting requirements. The requirement of a supermajority vote can limit the ability of shareholders to effect change by essentially providing a veto to a large minority shareholder or group of minority shareholders.

Dual Class Capitalizations
Because classes of common stock with unequal voting rights limit the rights of certain shareholders, the Fund will vote against adoption of a dual or multiple class capitalization structure.

Election of the board of directors

The Fund believes that the election of directors and an independent board is key to good corporate governance. Directors are expected to be competent, qualified individuals and they should be accountable, responsive to shareholders and should exercise reasonable judement. The Trust supports an independent board of directors and generally prefers that committees such as audit and nominating committees be compromised of independent members.

  • NEIG will generally support the election of directors that result in a board made up of a majority of independent directors.
  • NEIG will withhold votes for non-independent directors who serve on the audit, compensation, and/or nominating committees of the board.
  • NEIG will hold directors accountable for the actions of the committees on which they serve. For example, it will withhold votes for nominees who serve on the compensation committee if they approve excessive compensation arrangements or propose equity-based compensation plans that unduly dilute the ownership interests of stockholders.
  • NEIG will support efforts to declassify existing boards, and will oppose efforts by companies to adopt classified board structures.
  • NEIG generally favor separating the Chairmanship from the CEO position.
Corporate and social policy issues

The Fund believes that “ordinary business matters” are primarily the responsibility of management and should be approved solely by the corporation’s board of directors. Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. Ordinarily the Fund would not vote for such proposals unless supported by management.

Approval of independent auditors

The Fund believes that the relationship between the company and its auditors should be limited primarily to the audit engagement although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence.

  • NEIG will normally vote against proposed auditors where non-audit fees make up more than 25% of the total fees paid by the company to the audit firm.
  • NEIG will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether we believe independence has been compromised.
Other Situations

No set of guidelines can anticipate all situations that may arise. In special cases, Northeast Investors Growth Fund may seek insight from our portfolio managers and analysts on how a particular proxy proposal will impact the financial prospects of a company, and vote accordingly. The guidelines are just that: guidelines – but they are not hard and fast rules, simply because corporate governance issues are so varied, and individual judgment should be exercised in each case.

Potential Conflicts of Interest

In the event that any matter for which a proxy is solicited creates a potential conflict of interest between interests of the shareholders of the Fund, on the one hand, and its investment adviser, or any affiliated person or the Fund of its investment adviser, on the other, the voting of such proxy will be referred to the Trustees of the Fund who are not “interested persons” of the Fund as such term is defined in the Investment Company Act of 1940 (the “independent Trustees”); if the potential conflict is with an independent Trustee, such Trustee will abstain from voting on the matter. Conflicts of interest will be considered to exist if any Trustee or officer of the Fund serves as a member of the Board of Directors or owns more than 5% of the stock of the issuer seeking proxies or if any of them or the Fund’s investment adviser has a significant business relationship material to the Trustee, officer or investment adviser with such issuer.

Conclusion

In conclusion, the Fund believes that there is a strong correlation between enhancing shareholder value and sound corporate governance. These Proxy Voting Guidelines are intended to put this belief into action through the exercise of voting rights by the Fund.