UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number: 811-5003

 

 

Blue Chip Value Fund, Inc.

 (Exact name of registrant as specified in charter)

 

 

1225 17th Street, 26th Floor, Denver, Colorado 80202

 (Address of principal executive offices) (Zip code)

 

 

Michael P. Malloy
Drinker Biddle & Reath LLP

One Logan Square

Suite 2000

Philadelphia, Pennsylvania 19103-6996

 (Name and address of agent for service)

 

 

Registrant’s Telephone Number, including Area Code: (800) 624-4190

 

 

Date of fiscal year end: December 31

 

 

Date of reporting period: January 1, 2010 - December 31, 2010

 

 

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Item 1 - Reports to Stockholders

 

 

 

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INVESTMENT ADVISER’S COMMENTARY

Dear Fellow Stockholders:

February 8, 2011

Our research-driven disciplined investment process focuses on companies that seek to generate high levels of free cash flow, high returns on capital and lower volatility. Last year we had expected that the market would begin to reward these types of companies in the second year of a recovery. Unfortunately, in 2010 the Fund’s portfolio NAV return of 2.34% continued to meaningfully lag the S&P 500 Index return of 15.06%.

Turning to the portfolio, Union Pacific, a railroad operator, within the transportation sector was one of the Fund’s top performers during the year. Increased rail volume during the year led to substantial operating leverage and increased profit margins. Our research indicates that Union Pacific should continue to realize further operating efficiencies and continued growth in its free cash flow. Union Pacific’s performance helped contribute to the transportation sector’s outperformance.

The Fund’s best performing stock was Macy’s department store. The company continued its turnaround with improved same store sales and accelerated cash flows. Management also sought to strengthen the balance sheet by paying down debt. Late in the year we reduced the Fund’s position as the stock approached our price target. Led by Macy’s, the consumer cyclical sector was among the Fund’s top performing sectors.

Bank of America was among the Fund’s worst performing stocks during 2010. We believe that credit and economic activity are continuing to slowly recover. However, the combination of worse than expected impact from financial regulatory reform and growing concerns about the impact of poor mortgage origination practices overwhelmed these fundamentals. Prior to year-end, we sold the stock given the uncertain time frame for company management to bring resolution to these issues. Other Fund holdings within the interest rate sensitive sector performed better, leading to it being among the Fund’s top performing sectors.

Communications sector holding Cisco, a designer and manufacturer of Internet protocol-based networking and other communications products, delivered a disappointing earnings report and reduced expectations for demand. This guidance put downward pricing pressure on the stock, causing it to be one of the worst performing stocks in the portfolio.

We continue to focus on adapting to what remains a very difficult investing environment, though one that we believe contains significant investment opportunity. Amidst high levels of government intervention, from Federal Reserve policies to the implementation of healthcare and financial reform, job growth remains difficult to achieve.

 

2	Annual Report    December 31, 2010

 

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As always, we continue to spend considerable effort evaluating our investment approach looking for ways to improve upon our processes. We expect that our focus on companies with strong fundamentals that are undervalued by the market will be rewarded in 2011.

As you may know, stockholders have approved the reorganization of your Fund into Westcore Blue Chip Fund. We anticipate the conversion date of your account to be approximately March 28, 2011. Confirmation of your shares of Westcore Blue Chip Fund will be mailed in a timely manner following the conversion. If you have any questions, or would like to know more about the many investment options that will be available to you as a Westcore Funds shareholder, please call toll-free (800) 392-2673 or visit www.westcore.com.

Sincerely,

Todger Anderson, CFA
President, Blue Chip Value Fund, Inc.
Chairman, Denver Investment Advisors LLC

 

 

 

     The Investment Adviser’s Commentary included in this report contains certain forward-looking statements about the factors that may affect the performance of the Fund in the future. These statements are based on Fund management’s predictions and expectations concerning certain future events and their expected impact on the Fund, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors that may influence the future performance of the Fund. Management believes these forward-looking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed.

 

 

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4	Annual Report    December 31, 2010

 

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6	Annual Report    December 31, 2010

    

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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN

     On February 8, 2011 the Fund’s Board of Directors terminated the Fund’s Dividend Reinvestment and Cash Purchase Plan (the “Plan”) effective March 10, 2011.

     The final dividend or capital gains distribution, if any, declared and paid immediately prior to the closing of the reorganization will be paid entirely in cash, even to those shareholders who participated in the Plan.

     Effective March 10, 2011 participating stockholders are no longer permitted to make additional cash investments to acquire additional shares of the Fund.

     Until March 10, 2011 you may request the Plan Administrator to sell all or a portion of your shares. When your shares are sold, you will receive the proceeds less a service charge of $15.00 and trading fees of $0.02 per share. The Plan Administrator will generally sell your shares on the day your request is received in good order, however the Plan Administrator reserves the right to take up to 5 business days to sell your shares. Shares will be aggregated by the Plan Administrator with the shares of other participants selling their shares that day and sold on the open market. A participant will receive the weighted average price minus trading fees and service charges of all liquidated shares sold by the Plan Administrator on the transaction date.

     Additional information about the Plan may be obtained from the Plan Administrator by writing to BNY Mellon Shareowner Services, 480 Washington Blvd., Jersey City, NJ 07310, by telephone at (800) 624-4190 (option #1) or by visiting the Plan Administrator at www.bnymellon.com/shareowner.

OTHER IMPORTANT INFORMATION

How to Obtain a Copy of the Fund’s Proxy Voting Policies and Records

     A description of the policies and procedures that are used by the Fund’s investment adviser to vote proxies relating to the Fund’s portfolio securities is available (1) without charge, upon request, by calling (800) 624-4190; (2) on the Fund’s website at www.blu.com and (3) on the Fund’s Form N-CSR which is available on the U.S. Securities and Exchange Commission (“SEC”) website at www.sec.gov.

     Information regarding how the Fund’s investment adviser voted proxies relating to the Fund’s portfolio securities during the most recent 12-month period ended June 30 is available, (1) without charge, upon request by calling (800) 624-4190; (2) on the Fund’s website at www.blu.com and (3) on the SEC website at www.sec.gov.

 

8	Annual Report    December 31, 2010

 

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Quarterly Portfolio Holdings

     The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, the Fund’s complete schedule of portfolio holdings for the first and third quarters of each fiscal year is available on the Fund’s website at www.blu.com.

PORTFOLIO MANAGEMENT TEAM OF BLUE CHIP VALUE FUND

     Kris Herrick, CFA, Partner, Director of Value Research and Portfolio Manager, joined Denver Investments in 2000. Prior to joining the firm, he was an Equity Research Analyst with Jurika and Voyles (since 1997). He has 14 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

     Mark Adelmann, CFA, CPA, Partner and Portfolio Manager/Analyst, joined Denver Investments in 1995. He has 32 years total investment experience and has been the Fund’s portfolio manager since June 3, 2002.

     Derek Anguilm, Partner and Portfolio Manager/Analyst, joined Denver Investments in 2000. Prior to joining the firm he was with EVEREN Securities (since 1999). He has 12 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

     Troy Dayton, CFA, Partner and Portfolio Manager/Analyst, joined Denver Investments in 2002. Prior to joining the firm, he was an Equity Research Analyst with Jurika and Voyles (since 2001) and Dresdner RCM Global Investors (since 1998). He has 15 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

     Lisa Ramirez, CFA, Partner and Portfolio Manager/Analyst, joined Denver Investments as a portfolio administrator in 1993. She became an analyst on the Mid-Cap Growth team in 1997 and joined the Value team in 2005. She has 18 years total investment experience and joined the Fund’s portfolio management team on April 30, 2009.

 

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INFORMATION ON THE DIRECTORS AND OFFICERS OF THE FUND

     The list below provides certain information about the identity and business experience of the directors and officers of the Fund.

INTERESTED DIRECTORS*

TODGER ANDERSON, CFA¹
Age: 66

Position(s) Held with the Fund:
President and Director

Term of Office² and Length of Time Served:
President since 1987. Director from 1988 to 1995 and since 1998. Term as Director expires in 2013.

Principal Occupations During the Past Five Years:
Chairman, Denver Investment Advisors LLC (since 2004); President, Westcore Trust (since 2005);
President, Denver Investment Advisors LLC and predecessor organizations (1983-2004);
Portfolio Manager, Westcore MIDCO Growth Fund (1986-2005);
Portfolio Co-Manager, Westcore Select Fund (2001-2005).

Number of Portfolios in Fund Complex³ Overseen by Director: One

Other Directorships⁴ Held by Director: None

KENNETH V. PENLAND, CFA¹
Age: 68

Position(s) Held with the Fund:
Chairman of the Board and Director

Term of Office² and Length of Time Served:
Chairman of the Board and Director since 1987. Term as Director expires in 2012.

Principal Occupations During the Past Five Years:
Chairman, Denver Investment Advisors LLC and predecessor organizations (1983-2001);
President, Westcore Trust (1995-2001)
Trustee, Westcore Trust (2001-2005).

Number of Portfolios in Fund Complex³ Overseen by Director: One

Other Directorships⁴ Held by Director: None

 

10	Annual Report    December 31, 2010

 

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INDEPENDENT DIRECTORS

RICHARD C. SCHULTE¹
Age: 66

Position(s) Held with the Fund:
Director

Term of Office² and Length of Time Served:
Director since 1987. Term expires in 2011.

Principal Occupations During the Past Five Years:
Private Investor;
President, Transportation Service Systems, Inc., a subsidiary of Southern Pacific Lines, Denver, Colorado (1993-1996);
Employee, Rio Grande Industries, Denver, Colorado (holding company) (1991-1993).

Number of Portfolios in Fund Complex³ Overseen by Director: One

Other Directorships⁴ Held by Director: None

ROBERTA M. WILSON, CFA¹
Age: 67

Position(s) Held with the Fund:
Director

Term of Office² and Length of Time Served:
Director since 1987. Term expires in 2012.

Principal Occupations During the Past Five Years:
Management consultant and coach (since 1998);
Director of Finance, Denver Board of Water Commissioners (Retired), Denver, Colorado (1985-1998).

Number of Portfolios in Fund Complex³ Overseen by Director: One

Other Directorships⁴ Held by Director: None

LEE W. MATHER, JR.¹
Age: 67

Position(s) Held with the Fund:
Director

Term of Office² and Length of Time Served:
Director since 2001. Term expires in 2011.

Principal Occupations During the Past Five Years:
Director, American Rivers (conservation organization) (2000-2006);
Investment Banker, Merrill Lynch & Co. (1977-2000).

Number of Portfolios in Fund Complex³ Overseen by Director: One

Other Directorships⁴ Held by Director: None

 

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OFFICERS

MARK M. ADELMANN, CFA, CPA
Age: 53

1225 Seventeenth St.
26th Floor
Denver, Colorado 80202

Position(s) Held with the Fund:
Vice President

Term of Office² and Length of Time Served:
Vice President since 2002.

Principal Occupations During the Past Five Years:
Vice President (since 2000) and member (since 2001), Denver Investment Advisors LLC;
Research Analyst, Denver Investment Advisors LLC (since 1995);
Portfolio management team member, Westcore Trust (since 2002).

NANCY P. O’HARA
Age: 52

One Logan Square
Suite 2000
Philadelphia, PA 19103

Position(s) Held with the Fund:
Secretary

Term of Office² and Length of Time Served:
Secretary since 2007.

Principal Occupations During the Past Five Years:
Counsel (since 2009) and Associate (1999-2009) of the law firm of Drinker Biddle & Reath LLP, Philadelphia, PA.

JASPER R. FRONTZ, CPA, CFA⁵
Age: 42

1225 Seventeenth St.
26th Floor
Denver, Colorado 80202

Position(s) Held with the Fund:
Treasurer, Chief Compliance Officer

Term of Office² and Length of Time Served:
Treasurer since 1997, Chief Compliance Officer since 2004.

 

12	Annual Report    December 31, 2010

 

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Principal Occupations During the Past Five Years:
Vice President, Denver Investment Advisors LLC (since 2000);
Director of Mutual Fund Administration, Denver Investment Advisors LLC (since 1997);
Fund Controller, ALPS Mutual Fund Services, Inc. (1995-1997);
Registered Representative, ALPS Distributors, Inc. (since 1995).

NOTES

*	These directors each may be deemed to be an “interested director” of the Fund within the meaning of the Investment Company Act of 1940 by virtue of their affiliations with the Fund’s investment adviser and their positions as officers of the Fund.
1.	Each director may be contacted by writing to the director, c/o Blue Chip Value Fund, Inc., 1225 Seventeenth Street, 26th Floor, Denver, Colorado 80202, Attn: Jasper Frontz.
2.	The Fund’s By-Laws provide that the Board of Directors shall consist of three classes of members. Directors are chosen for a term of three years, and the term of one class of directors expires each year. The officers of the Fund are elected by the Board of Directors and, subject to earlier termination of office, each officer holds office for one year and until his or her successor is elected and qualified.
3.	The Fund complex is comprised of sixteen portfolios, the Fund, twelve Westcore Funds, the Dunham Small-Cap Value Fund, the Columbia Variable Portfolio-Partners Small-Cap Value Fund and the Northern Trust Multi-Manager Small Cap Fund.
4.	Includes only directorships of companies required to report to the Securities and Exchange Commission under the Securities Exchange Act of 1934 (i.e., “public companies”) or other investment companies registered under the Investment Company Act of 1940.
5.	Mr. Frontz also serves as Treasurer and Chief Compliance Officer of Westcore Trust.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Blue Chip Value Fund, Inc.:

     We have audited the accompanying statement of assets and liabilities of Blue Chip Value Fund, Inc. (the “Fund”), including the statement of investments, as of December 31, 2010, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2010, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Blue Chip Value Fund, Inc. as of December 31, 2010, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

DELOITTE & TOUCHE LLP
Denver, Colorado
February 15, 2011

 

14	Annual Report   December 31, 2010

 

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16	Annual Report    December 31, 2010

 

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18	Annual Report    December 31, 2010

 

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20	Annual Report    December 31, 2010

 

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22	Annual Report    December 31, 2010

 

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24	Annual Report    December 31, 2010

 

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BLUE CHIP VALUE FUND, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 2010

1. ORGANIZATION

     Blue Chip Value Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company.

2. SIGNIFICANT ACCOUNTING POLICIES

     The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.

Security Valuation – All securities of the Fund are valued as of the close of regular trading on the New York Stock Exchange (“NYSE”), generally 4:00 p.m. (Eastern Time), on each day that the NYSE is open. Listed securities are generally valued at the last sales price as of the close of regular trading on the NYSE. Securities traded on the National Association of Securities Dealers Automated Quotation (“NASDAQ”) are generally valued at the NASDAQ Official Closing Price (“NOCP”). In the absence of sales and NOCP, such securities are valued at the mean of the bid and asked prices.

     Securities having a remaining maturity of 60 days or less are valued at amortized cost which approximates market value.

     When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value determined in good faith by or under the direction of the Board of Directors. Factors which may be considered when determining the fair value of a security include (a) the fundamental data relating to the investment; (b) an evaluation of the forces which influence the market in which the security is sold, including the liquidity and depth of the market; (c) the market value at date of purchase; (d) information as to any transactions or offers with respect to the security or comparable securities; and (e) any other relevant matters.

Investment Transactions – Investment transactions are accounted for on the date the investments are purchased or sold (trade date). Realized gains and losses from investment transactions and unrealized appreciation and depreciation of investments are determined on the “specific identification” basis for both financial statement and federal income tax purposes. Dividend income is recorded on the ex-dividend date. Interest income, which includes interest earned on money market funds, is accrued and recorded daily.

 

26	Annual Report    December 31, 2010

 

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Federal Income Taxes – No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.

     The Fund evaluates tax positions taken (or expected to be taken) in the course of preparing the Fund’s tax returns to determine whether these positions meet a “more-likely-than-not” standard that, based on the technical merits, have a more than fifty percent likelihood of being sustained by a taxing authority upon examination. A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.

     Management of the Fund analyzes all open tax years, as defined by the Statute of Limitations, for all major jurisdictions, including federal tax authorities and certain state tax authorities. As of and during the fiscal year ended December 31, 2010, the Fund did not have a liability for any unrecognized tax benefits. The Fund files income tax returns in the U.S. federal jurisdiction and Colorado. For the years ended December 31, 2007 through December 31, 2010 for the federal jurisdiction and for the years ended December 31, 2006 through December 31, 2010, for Colorado, the Fund’s returns are still open to examination by the appropriate taxing authority.

Classification of Distributions to Shareholders – Net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Fund.

The tax character of the distributions paid was as follows:

	Year Ended			Year Ended
	December 31,			December 31,
	2010			2009
Distributions paid from:
Ordinary income	$	506,658		$	463,872
Tax return of capital		—		$	3,521,833
Total	$	506,658		$	3,985,705

     For the year ended December 31, 2010, the following permanent differences have been reclassified to/from the following accounts:

	Undistributed			Accumulated
	Net Investment			Capital			Paid In
	Income			Gains/(Losses)			Capital
Increase (decrease)	$	205,000		$	0		$	(205,000)

 

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     The reclassifications were primarily a result of different book/tax treatment of certain tax adjustments.

     As of December 31, 2010, the components of distributable earnings on a tax basis were as follows:

Undistributed net investment income	$	203,803
Accumulated net realized loss		(5,993,454)
Net unrealized appreciation		6,309,218
Total	$	519,567

     At December 31, 2010, the Fund had available for tax purposes unused capital loss carryovers of $254,156, expiring December 31, 2017, and unused capital loss carryovers of $5,739,298, expiring December 31, 2018.

     The difference between book basis and tax basis is typically attributable to the tax deferral of losses on wash sales.

Distributions to Stockholders – Distributions to stockholders are recorded on the ex-dividend date.

     Prior to May 1, 2009, the Fund maintained a “managed distribution policy” (the “Policy”) which distributed at least 2.5% of its net asset value quarterly to its stockholders. The Fund declared and paid the first quarter distribution in April 2009. This distribution was not related to the amount of the Fund’s net investment income or net realized capital gains or losses and will be classified to conform to the tax reporting requirements of the Internal Revenue Code. If the Fund’s total distributions for the year exceed the Fund’s “current and accumulated earnings and profits,” the excess will be treated as non-taxable return of capital, reducing the stockholder’s adjusted basis in their shares.

     The Fund’s Policy was suspended, as approved by the Board of Directors, at the regular meeting held May 1, 2009. The Board took this action after considering a number of factors including, but not limited to, the outlook for the overall economy, an assessment of investment opportunities, the asset size and expense ratio of the Fund and the negative impact that the policy may have on the asset level and expense ratio. The Fund will continue to pay out any net investment income and net realized capital gains on an annual basis.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.

 

28	Annual Report    December 31, 2010

 

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3. FAIR VALUE MEASUREMENTS

     A three-tier hierarchy has been established for fair value measurement based on the extent of use of “observable inputs” as compared to “unobservable inputs” for disclosure purposes and requires additional disclosures about these valuations measurements. Inputs refer broadly to the assumptions that market participants would use in pricing a security. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the security developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the security developed based on the best information available in the circumstances.

    The three-tier hierarchy is summarized as follows:

Level 1 – Quoted and Unadjusted Prices in active markets for identical investments.

Level 2 – Other Significant Observable Inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).

Level 3 – Significant Unobservable Inputs (including the Fund’s own assumptions in determining the fair value of investments).

     The following is a summary of the inputs used as of December 31, 2010 in valuing the Fund’s assets:

Assets:				Level 2 –
		Level 1 –		Other			Level 3 –
		Quoted &		Significant			Significant
Investments in		Unadjusted		Observable			Unobservable
Securities at Value*		Prices		Inputs			Inputs				Total
Common Stocks	$	108,316,325		$	—		$	—		$	108,316,325
Short Term Investments		1,343,529			—			—			1,343,529
Total	$	109,659,854		$	—		$	—		$	109,659,854
*For detailed Industry descriptions, see the accompanying Statement of Investments.

     All securities of the Fund were valued using Level 1 inputs during the year ended December 31, 2010. Thus a reconciliation of assets in which significant unobservable inputs (Level 3) were used is not applicable.

     The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

 

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4. UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS (TAX BASIS)

As of December 31, 2010:
Gross appreciation (excess of value over tax cost)	$	10,287,552
Gross depreciation (excess of tax cost over value)		(3,978,334)
Net unrealized appreciation	$	6,309,218
Cost of investments for income tax purposes	$	103,350,636

5. INVESTMENT ADVISORY AND ADMINISTRATION SERVICES

     The Fund has an Investment Advisory Agreement with Denver Investment Advisors LLC, also doing business as Denver Investments (“Denver Investments”), whereby an investment advisory fee is paid to Denver Investments based on an annual rate of 0.65% of the Fund’s average weekly net assets up to $100,000,000 and 0.50% of the Fund’s average weekly net assets in excess of $100,000,000. The management fee is paid monthly based on the average of the net assets of the Fund computed as of the last business day the New York Stock Exchange is open each week. Certain officers and a director of the Fund are also officers of Denver Investments.

     ALPS Fund Services, Inc. (“ALPS”) and Denver Investments serve as the Fund’s co-administrators. The Administrative Agreement includes the Fund’s administrative and fund accounting services. The administrative services fee is based on the current annual rate for ALPS and Denver Investments, respectively, of 0.0955% and 0.01% of the Fund’s average daily net assets up to $75,000,000, 0.05%, and 0.005% of the Fund’s average daily net assets between $75,000,000 and $125,000,000, and 0.03% and 0.005% of the Fund’s average daily net assets in excess of $125,000,000 plus certain out-of-pocket expenses. The administrative service fee is paid monthly.

     The Directors have appointed a Chief Compliance Officer who is also Treasurer of the Fund and an employee of Denver Investments. The Directors agreed that the Fund would reimburse Denver Investments a portion of his compensation for his services as the Fund’s Chief Compliance Officer.

6. LINE OF CREDIT

     The Fund had a line of credit with The Bank of New York Mellon (“BONY”), which was terminated December 1, 2010, in which the Fund could borrow up to the lesser of 15% of the Fund’s total assets, $15,000,000 or the maximum amount the Fund was permitted to borrow under the Investment Company Act of 1940. For the period January 1, 2010 through February 28, 2010 the interest rate reset daily at overnight Federal Funds Rate plus 1.00%. Effective March 1, 2010, the interest rate changed to the overnight Federal Funds Rate plus 1.25% and the Fund paid an annual loan facility fee of 0.03%. The borrowings under the BONY loan were secured by a perfected security interest on all of the Fund’s assets.

 

30	Annual Report    December 31, 2010

 

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Details of the line of credit are as follows:
	Average for the
	Year Ended
	December 31,
	2010
Loan outstanding	$	5,858,552
Interest rate		1.33%
% of Fund’s total assets		5.33%
Amount of debt per share outstanding	$	0.21
Number of shares outstanding (in thousands)		28,464	*
*Weighted average

7. PLANNED REORGANIZATION

     On November 18, 2010, the Blue Chip Value Fund, Inc. and Westcore Blue Chip Fund announced that their respective Boards of Directors and Trustees formally approved a plan to reorganize whereby Westcore Blue Chip Fund will acquire all the assets and assume all the liabilities of Blue Chip Value Fund in a tax free reorganization (the “Merger”). On February 8, 2011 the Merger was approved by the Blue Chip Value Fund stockholders. The conversion and reorganization date is anticipated to be March 28, 2011.

8. TAX DESIGNATIONS (Unaudited)

     Certain tax information is provided to shareholders as required by the Internal Revenue Code or to meet a specific state’s requirement. The Fund designates the following amounts or, if subsequently determined to be different, the maximum amount allowable for its fiscal year ended December 31, 2010:

 

1-800-624-4190 • www.blu.com

31

 

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32	Annual Report    December 31, 2010

 

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Item 2. Code of Ethics.

 

(a)  The registrant, as of the end of the period covered by the report, has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions on behalf of the registrant. 

 

(b)  Not applicable.

 

(c)  During the period covered by this report, no amendments were made to the provisions of the code of ethics adopted in 2(a) above.

 

(d)  During the period covered by this report, no implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a) above were granted.

 

(e)  Not applicable.

 

(f)   The registrant’s Code of Ethics is filed as Exhibit 12(a)(1) to this report.

Item 3. Audit Committee Financial Expert.

The Board of Directors of the registrant has determined that the registrant has at least one “audit committee financial expert” serving on its audit committee.  The Board of Directors has designated Roberta M. Wilson as the registrant’s “audit committee financial expert.”  Ms. Wilson is “independent” as defined in paragraph (a)(2) of Item 3 to Form N-CSR.

Item 4. Principal Accountant Fees and Services.

 

(a)                Audit Fees:  For the registrant's fiscal years ended December 31, 2010 and December 31, 2009, the aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements were $27,175 and $26,800, respectively.

(b)               Audit-Related Fees:  In registrant's fiscal years ended December 31, 2010 and December 31, 2009, aggregate fees of $12,000 and $0, respectively, were billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item.

(c)                Tax Fees:  For the registrant's fiscal years ended December 31, 2010 and December 31, 2009, aggregate fees of $2,770 and $2,770, respectively, were billed for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. 

(d)               All Other Fees:  For the registrant's fiscal year ended December 31, 2010 and December 31, 2009, no fees were billed  for professional services rendered by the principal accountant for review of financial and accounting matters in connection with the filing of Form N-14 with the SEC.

 

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(e) (1)   Audit Committee Pre-Approval Policies and Procedures:  The registrant’s Audit Committee has not adopted pre-approval policies and procedures.  Instead, the Audit Committee approves on a case-by-case basis each audit or non-audit service before the engagement.

            (e)(2)   No services described in paragraphs (b) through (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

(f)        Not applicable.

(g)       Aggregate non-audit fees of $2,770 and $2,770 were billed by the registrant's principal accountant for services rendered to the registrant and to registrant's investment adviser for the registrant's fiscal year ended December 31, 2010 and December 31, 2009, respectively.

(h)       Not applicable.

Item 5. Audit Committee of Listed Registrants.

 

(a)  The registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.  The committee members are:  Roberta M. Wilson, Richard C. Schulte and Lee W. Mather, Jr.

 

(b)  Not applicable.

 

Item 6. Investments.

 

(a)       Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the Report to Stockholders filed under Item 1 of this Form N-CSR.

 

(b)       Not applicable.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

 

The registrant’s Board of Directors, at their May 2003 Board meeting, delegated to its investment adviser, Denver Investment Advisors, LLC, (“Denver Investments”) subject to the supervision of the Board, the authority to vote registrant’s proxies relating to portfolio securities and directed Denver Investments to follow and apply Denver Investments’ proxy voting policies and procedures when voting such proxies.  A summary of Denver Investments’ Proxy Voting Policy which sets forth the guidelines to be utilized by Denver Investments in voting proxies for the registrant follows.

 

Summary of Denver Investments Proxy Voting Policy

 

Denver Investments, unless otherwise directed by our clients, will make reasonable attempts to research, vote and record all proxy ballots for the security positions we maintain on our clients’ behalf.  To execute this responsibility to the highest standard, Denver Investments relies heavily on its subscription to RiskMetrics Group.  RiskMetrics Group provides proxy research and recommendations, as well as automated voting and record keeping through its ISS Governance Services (“ISS”). Although RiskMetrics Group offers other consulting services to companies that it also makes proxy vote recommendations on, we review their policies and certain reports regarding its internal controls a minimum of once per year and will only use RiskMetrics Group’s ISS as long as we deem it independent.

 

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We review ISS’ Proxy Voting Guidelines at least annually and follow their recommendations on most issues for shareholder vote. 

 

In the rare instance where our portfolio research or security Analyst believes that any ISS recommendation would be to the detriment of our investment clients, we can and will override the ISS recommendation through a manual vote.  The final authorization to override an ISS recommendation must be approved by the CCO or a member of the Management Committee, other than the Analyst seeking the override. A written record supporting the decision to override the ISS recommendation will be maintained.

 

Special considerations are made for stocks traded on foreign exchanges.  Specifically, if voting will hinder or impair the liquidity of these stocks, Denver Investments will not exercise its voting rights.

 

For any matters subject to proxy vote for mutual funds in which Denver Investments is an affiliated party, Denver Investments will vote on behalf of clients invested in such mutual funds in accordance with ISS, with no exceptions.

 

Client information is automatically recorded in RiskMetric Group’s system for record keeping. RiskMetrics Group provides the necessary reports for the Blue Chip Value Fund to prepare its Form N-PX annually.

 

Below is a condensed version of the proxy voting recommendations contained in the ISS Proxy Voting Manual.

 

 

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2011 U.S. Proxy Voting Guidelines Concise Summary

 

(Digest of Selected Key Guidelines)

 

January 3, 2011

 

 

 

 

 

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Institutional Shareholder Services Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Copyright © 2011 by ISS.

The policies contained herein are a sampling of select, key proxy voting guidelines and are not exhaustive. A full listing of ISS’s 2011 proxy voting guidelines can be found in the Jan. 15, 2011, edition of the U.S. Proxy Voting Manual, and in the 2011 U.S. Proxy Voting Guidelines Summary.

 

 

 

 

 

www.issgovernance.com

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Routine/Miscellaneous

 

Auditor Ratification

 

Vote FOR proposals to ratify auditors, unless any of the following apply:

• An auditor has a financial interest in or association with the company, and is therefore not independent;

• There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company’s financial position;

• Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or

• Fees for non-audit services (“Other” fees) are excessive.

Non-audit fees are excessive if:

• Non-audit (“other”) fees >audit fees + audit-related fees + tax compliance/preparation fees

 

 

Board of Directors

 

Voting on Director Nominees in Uncontested Elections

 

Votes on director nominees should be determined CASE-BY-CASE.

 

Four fundamental principles apply when determining votes on director nominees:

 

1.     Board Accountability

2.     Board Responsiveness

3.     Director Independence

4.     Director Competence

 

1.   Board Accountability

VOTE WITHHOLD/AGAINST¹ the entire board of directors (except new nominees², who should be considered CASE-BY- CASE), for the following:

 

Problematic Takeover Defenses:

 

1.1.  The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election -- any or all appropriate nominees (except new) may be held accountable;

 

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¹ In general, companies with a plurality vote standard use “Withhold” as the valid contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.

 

² A “new nominee” is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the problematic action transpired, the nominee will be considered a “new nominee” if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.

 

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1.2.   The board lacks accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s five-year total shareholder return and five-year operational metrics. Problematic provisions include but are not limited to:

•     A classified board structure;

•     A supermajority vote requirement;

•     Majority vote standard for director elections with no carve out for contested elections;

•    The inability for shareholders to call special meetings;

•     The inability for shareholders to act by written consent;

•     A dual-class structure; and/or

•     A non-shareholder approved poison pill.

1.3.   The company’s poison pill has a “dead-hand” or “modified dead-hand” feature. Vote withhold/against every year until this feature is removed;

1.4.   The board adopts a poison pill with a term of more than 12 months (“long-term pill”), or renews any existing pill, including any “short-term” pill (12 months or less), without shareholder approval. A commitment or policy that puts a newly-adopted pill to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually-elected boards at least once every three years, and vote AGAINST or WITHHOLD votes from all nominees if the company still maintains a non-shareholder-approved poison pill. This policy applies to all companies adopting or renewing pills after the announcement of this policy (Nov 19, 2009);

1.5.   The board makes a material adverse change to an existing poison pill without shareholder approval.

 

Vote CASE-BY-CASE on all nominees if:

 

1.6.    the board adopts a poison pill with a term of 12 months or less (“short-term pill”) without shareholder approval, taking into account the following factors:

•     The date of the pill's adoption relative to the date of the next meeting of shareholders- i.e. whether the company had time to put the pill on ballot for shareholder ratification given the circumstances;

•     The issuer's rationale;

•     The issuer's governance structure and practices; and

•     The issuer's track record of accountability to shareholders.

 

Problematic Audit-Related Practices

 

Generally, vote AGAINST or WITHHOLD from the members of the Audit Committee if:

 

1.7.  The non-audit fees paid to the auditor are excessive (see discussion under “Auditor Ratification”);

1.8.  The company receives an adverse opinion on the company’s financial statements from its auditor; or

1.9.  There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

 

Vote CASE-BY-CASE on members of the Audit Committee and/or the full board if:

 

1.10. Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether WITHHOLD/AGAINST votes are warranted.

 

 

 

Problematic Compensation Practices

 

Vote WITHHOLD/AGAINST the members of the Compensation Committee and potentially the full board if:

 

 

 

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1.11. There is a negative correlation between chief executive pay and company performance (see  Pay for Performance Policy);

1.12. The company reprices underwater options for stock, cash, or other consideration without prior shareholder approval, even if allowed in the company's equity plan;

1.13. The company fails to submit one-time transfers of stock options to a shareholder vote;

1.14. The company fails to fulfill the terms of a burn rate commitment made to shareholders;

1.15. The company has problematic pay practices. Problematic pay practices may warrant withholding votes from the CEO and potentially the entire board as well.

 

Governance Failures

 

Under extraordinary circumstances, vote AGAINST or WITHHOLD from directors individually, committee members, or the entire board, due to:

 

1.16. Material failures of governance, stewardship, or fiduciary responsibilities at the company;

1.17. Failure to replace management as appropriate; or

1.18. Egregious actions related to the director(s)’ service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.

 

2.   Board Responsiveness

 

Vote WITHHOLD/AGAINST the entire board of directors (except new nominees, who should be considered CASE -BY-CASE), if:

 

2.1.  The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year;  or

 

2.2.  The board failed to act on a shareholder proposal that received approval of the majority of shares cast in the last year and one of the two previous years.

 

2.3.  The board failed to act on takeover offers where the majority of the shareholders tendered their shares; or

 

2.4.  At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote.

 

3.   Director Independence

 

Vote WITHHOLD/AGAINST Inside Directors and Affiliated Outside Directors (per the Categorization of Directors) when:

 

3.1.  The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;

 

3.2.  The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;

 

3.3.  The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or

 

3.4.  The full board is less than majority independent.

 

4.   Director Competence

 

VOTE WITHHOLD/AGAINST the entire board of directors (except new nominees, who should be considered CASE-BY-CASE), if:

 

4.1.   The company’s proxy indicates that not all directors attended 75 percent of the aggregate board and committee meetings, but fails to provide the required disclosure of the names of the director(s) involved.

 

 

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Generally vote AGAINST or WITHHOLD from individual directors who:

 

4.2.   Attend less than 75 percent of the board and committee meetings (with the exception of new nominees).

Acceptable reasons for director(s) absences are generally limited to the following:

•     Medical issues/illness;

•     Family emergencies; and

•     If the director's total service was three meetings or fewer and the director missed only one meeting.

 

These reasons for directors' absences will only be considered by ISS if disclosed in the proxy or another SEC filing. If the disclosure is insufficient to determine whether a director attended at least 75 percent of board and committee meetings in aggregate, vote AGAINST/WITHHOLD from the director.

 

Vote AGAINST or WITHHOLD from individual directors who:

 

4.3.  Sit on more than six public company boards; or

 

4.4.  Are CEOs of public companies who sit on the boards of more than two public companies besides their own-- withhold only at their outside boards.

 

 

Voting for Director Nominees in Contested Elections

 

Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors:

• Long-term financial performance of the target company relative to its industry;

• Management’ s track record;

• Background to the proxy contest;

• Qualifications of director nominees (both slates);

• Strategic plan of dissident slate and quality of critique against management;

• Likelihood that the proposed goals and objectives can be achieved (both slates);

• Stock ownership positions.

 

 

Independent Chair (Separate Chair/CEO)

 

Generally vote FOR shareholder proposals requiring that the chairman’s position be filled by an independent director, unless the company satisfies all of the following criteria:

 

The company maintains the following counterbalancing governance structure:

 

•      Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties. (The role may alternatively reside with a presiding director, vice chairman, or rotating lead director; however the director must serve a minimum of one year in order to qualify as a lead director.) The duties should include, but are not limited to, the following:

-      presides at all meetings of the board at which the chairman is not present, including executive sessions of the independent directors;

-      serves as liaison between the chairman and the independent directors;

-      approves information sent to the board;

-      approves meeting agendas for the board;

-      approves meeting schedules to assure that there is sufficient time for discussion of all agenda items;

-      has the authority to call meetings of the independent directors;

-      if requested by major shareholders, ensures that he is available for consultation and direct communication;

 

 

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In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.

 

 

 

 

 

Poison Pills- Management Proposals toRatify a Pill to Preserve Net Operating Losses (NOLs)

Vote AGAINST proposals to adopt a poison pill for the stated purpose of protecting a company's net operating losses (“NOLs”) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.

 

Vote CASE-BY-CASE on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:

• The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);

• The value of the NOLs;

• Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs);

• The company's existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and

• Any other factors that may be applicable.

 

 

 

Shareholder Ability to Act by Written Consent

 

Generally vote AGAINST management and shareholder proposals to restrict or prohibit shareholders' ability to act by written consent.

 

Generally vote FOR management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:

• Shareholders' current right to act by written consent;

• The consent threshold;

• The inclusion of exclusionary or prohibitive language;

• Investor ownership structure; and

• Shareholder support of, and management's response to, previous shareholder proposals.

 

Vote CASE-BY-CASE on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:

• An unfettered³ right for shareholders to call special meetings at a 10 percent threshold;

• A majority vote standard in uncontested director elections;

• No non-shareholder-approved pill; and

• An annually elected board.

 

 

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³ "Unfettered" means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.

 

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2.     Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;

3.     Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);

4.     Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;

5.     Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.

 

 

 

Advisory Votes on Executive Compensation- Management Proposals (Management Say-on-Pay)

 

 

Evaluate executive pay and practices, as well as certain aspects of outside director compensation CASE-BY-CASE.

 

 

Vote AGAINST management say on pay (MSOP) proposals, AGAINST/WITHHOLD on compensation committee members (or, in rare cases where the full board is deemed responsible, all directors including the CEO), and/or AGAINST an equity-based incentive plan proposal if:

•     There is a misalignment between CEO pay and company performance (pay for performance);

•     The company maintains problematic pay practices;

•      The board exhibits poor communication and responsiveness to shareholders.

 

Voting Alternatives

 

In general, the management say on pay (MSOP) ballot item is the primary focus of voting on executive pay practices-- dissatisfaction with compensation practices can be expressed by voting against MSOP rather than withholding or voting against the compensation committee. However, if there is no MSOP on the ballot, then the negative vote will apply to members of the compensation committee. In addition, in egregious cases, or if the board fails to respond to concerns raised by a prior MSOP proposal, then vote withhold or against compensation committee members (or, if the full board is deemed accountable, all directors). If the negative factors involve equity-based compensation, then vote AGAINST an equity-based plan proposal presented for shareholder approval.

 

Additional CASE-BY-CASE considerations for the management say on pay (MSOP) proposals:

• Evaluation of performance metrics in short-term and long-term plans, as discussed and explained in the Compensation Discussion & Analysis (CD&A).  Consider the measures, goals, and target awards reported by the company for executives’ short- and long-term incentive awards: disclosure, explanation of their alignment with the company’ s business strategy, and whether goals appear to be sufficiently challenging in relation to resulting payouts;

• Evaluation of peer group benchmarking used to set target pay or award opportunities. Consider the rationale stated by the company for constituents in its pay benchmarking peer group, as well as the benchmark targets it uses to set or validate executives’ pay (e.g., median, 75th percentile, etc.,) to ascertain whether the benchmarking process is sound or may result in pay “ratcheting” due to inappropriate peer group constituents (e.g., much larger companies) or targeting (e.g., above median); and

 

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• Balance of performance-based versus non-performance-based pay. Consider the ratio of performance-based (not including plain vanilla stock options) vs. non-performance-based pay elements reported for the CEO’s latest reported fiscal year compensation, especially in conjunction with concerns about other factors such as performance metrics/goals, benchmarking practices, and pay-for-performance disconnects.

 

 

Primary Evaluation Factors for Executive Pay

 

Pay for Performance
 

Evaluate the alignment of the CEO’s pay with performance over time, focusing particularly on companies that have underperformed their peers over a sustained period. From a shareholders’ perspective, performance is predominantly gauged by the company’s stock performance over time. Even when financial or operational measures are utilized in incentive awards, the achievement related to these measures should ultimately translate into superior shareholder returns in the long-term.

 

Focus on companies with sustained underperformance relative to peers, considering the following key factors:

• Whether a company’ s one-year and three-year total shareholder returns (“TSR”) are in the bottom half of its industry group (i.e., four-digit GICS – Global Industry Classification Group); and

• Whether the total compensation of a CEO who has served at least two consecutive fiscal years is aligned with the company’s total shareholder return over time, including both recent and long-term periods.

If a company falls in the bottom half of its four-digit GICS, further analysis of the CD&A is required to better understand the various pay elements and whether they create or reinforce shareholder alignment.  Also assess the CEO’s pay relative to the company’s TSR over a time horizon of at least five years. The most recent year-over-year increase or decrease in pay remains a key consideration, but there will be additional emphasis on the long term trend of CEO total compensation relative to shareholder return.  Also consider the mix of performance-based compensation relative to total compensation. In general, standard stock options or time-vested restricted stock are not considered to be performance-based. If a company provides performance-based incentives to its executives, the company is highly encouraged to provide the complete disclosure of the performance measure and goals (hurdle rate) so that shareholders can assess the rigor of the performance program.  The use of non-GAAP financial metrics also makes it very challenging for shareholders to ascertain the rigor of the program as shareholders often cannot tell the type of adjustments being made and if the adjustments were made consistently. Complete and transparent disclosure helps shareholders to better understand the company’s pay for performance linkage.

 

Problematic Pay Practices

If the company maintains problematic pay practices, generally vote:

 

•      AGAINST management "say on pay" (MSOP) proposals;

•      AGAINST/WITHHOLD on compensation committee members (or in rare cases where the full board is deemed responsible, all directors including the CEO):

o    In egregious situations;

o    When no MSOP item is on the ballot; or

o    When the board has failed to respond to concerns raised in prior MSOP evaluations; and/or

•      AGAINST an equity incentive plan proposal if excessive non-performance-based equity awards are the major contributors to a pay-for-performance misalignment.

 

 

The focus is on executive compensation practices that contravene the global pay principles, including:

 

•       Problematic practices related to non-performance-based compensation elements;

•       Incentives that may motivate excessive risk-taking; and

•       Options Backdating.

 

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Problematic Pay Practices related to Non-Performance-Based Compensation Elements

 

Pay elements that are not directly based on performance are generally evaluated CASE-BY-CASE considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy.  Please refer to ISS' Compensation FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:

 

•         Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);

•         Excessive perquisites or tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;

•         New or extended agreements that provide for:

o    CIC payments exceeding 3 times base salary and average/target/most recent bonus;

o    CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);

o    CIC payments with excise tax gross-ups (including "modified" gross-ups).

 

Incentives that may Motivate Excessive Risk-Taking

 

Assess company policies and disclosure related to compensation that could incentivize excessive risk-taking, for example:

 

•       Multi-year guaranteed bonuses;

•       A single performance metric used for short- and long-term plans;

•       Lucrative severance packages;

•       High pay opportunities relative to industry peers;

•       Disproportionate supplemental pensions; or

•       Mega annual equity grants that provide unlimited upside with no downside risk.

 

Factors that potentially mitigate the impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.

 

Options Backdating

 

Vote CASE-BY-CASE on options backdating issues. Generally, when a company has recently practiced options backdating, WITHHOLD from or vote AGAINST the compensation committee, depending on the severity of the practices and the subsequent corrective actions on the part of the board. When deciding on votes on compensation committee members who oversaw questionable options grant practices or current compensation committee members who fail to respond to the issue proactively, consider several factors, including, but not limited to, the following:

• Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;

• Duration of options backdating;

• Size of restatement due to options backdating;

• Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and

• Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.

 

 

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A CASE-BY-CASE analysis approach allows distinctions to be made between companies that had “sloppy” plan administration versus those that acted deliberately and/or committed fraud, as well as those companies that subsequently took corrective action. Cases where companies have committed fraud are considered most egregious.

 

Board Communications and Responsiveness

Consider the following factors CASE-BY-CASE when evaluating ballot items related to executive pay:

 

•      Poor disclosure practices, including:

-     Unclear explanation of how the CEO is involved in the pay setting process;

-     Retrospective performance targets and methodology not discussed;

-     Methodology for benchmarking practices and/or peer group not disclosed and explained.

•      Board’s responsiveness to investor input and engagement on compensation issues, for example:

-     Failure to respond to majority-supported shareholder proposals on executive pay topics; or

-     Failure to respond to concerns raised in connection with significant opposition to MSOP proposals.

 

Frequency of Advisory Vote on Executive Compensation (Management "Say on Pay")

 

Vote FOR annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.

 

 

 

 

Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale

 

Vote CASE-BY-CASE on proposals to approve the company's golden parachute compensation, consistent with ISS' policies on problematic pay practices related to severance packages. Features that may lead to a vote AGAINST include:

 

• Recently adopted or materially amended agreements that include excise tax gross-up provisions (since prior annual meeting);

• Recently adopted or materially amended agreements that include modified single triggers (since prior annual meeting);

• Single trigger payments that will happen immediately upon a change in control, including cash payment and such items as the acceleration of performance-based equity despite the failure to achieve performance measures;

• Single-trigger vesting of equity based on a definition of change in control that requires only shareholder approval of the transaction (rather than consummation);

• Potentially excessive severance payments;

• Recent amendments or other changes that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders;

• In the case of a substantial gross-up from pre-existing/grandfathered contract: the element that triggered the gross-up (i.e., option mega-grants at low point in stock price, unusual or outsized payments in cash or equity made or negotiated prior to the merger); or

• The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. ISS would view this as problematic from a corporate governance perspective.

 

In cases where the golden parachute vote is incorporated into a company's separate advisory vote on compensation ("management "say on pay"), ISS will evaluate the "say on pay" proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.

 

 

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• Whether providing this information would reveal proprietary or confidential information that would place the company at a competitive disadvantage.

Board Diversity

 

Generally vote FOR requests for reports on the company's efforts to diversify the board, unless:

• The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and

• The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.

 

Vote CASE-BY-CASE on proposals asking the company to increase the gender and racial minority representation on its board, taking into account:

• The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;

• The level of gender and racial minority representation that exists at the company’s industry peers;

• The company’s established process for addressing gender and racial minority board representation;

• Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;

• The independence of the company’s nominating committee;

• The company uses an outside search firm to identify potential director nominees; and

• Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.

 

Gender Identity, Sexual Orientation, and Domestic Partner Benefits

 

Generally vote FOR proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would result in excessive costs for the company.

 

Generally vote AGAINST proposals to extend company benefits to, or eliminate benefits from domestic partners. Decisions regarding benefits should be left to the discretion of the company.

 

 

Greenhouse Gas (GHG) Emissions

 

Generally vote FOR proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:

• The company already provides current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;

• The company's level of disclosure is comparable to that of industry peers; and

• There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.

Vote CASE-BY-CASE on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:

 

• Overly prescriptive requests for the reduction in GHG emissions by specific amounts or within a specific time frame;

• Whether company disclosure lags behind industry peers;

 

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• Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions;

• The feasibility of reduction of GHGs given the company’s product line and current technology and;

• Whether the company already provides meaningful disclosure on GHG emissions from its products and operations.

 

 

 

Environmental, Social, and Governance (ESG) Compensation-Related Proposals

 

Generally vote AGAINST proposals to link, or report on linking, executive compensation to environmental and social criteria such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, or predatory lending. However, the following factors will be considered:

• Whether the company has significant and persistent controversies or violations regarding social and/or environmental issues;

• Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;

• The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and

• The company‘s current level of disclosure regarding its environmental and social performance.

Generally vote AGAINST proposals calling for an analysis of the pay disparity between corporate executives and other non - executive employees. The value of the information sought by such proposals is unclear.

 

 

Political Contributions and Trade Associations Spending

 

Generally vote AGAINST proposals asking the company to affirm political nonpartisanship in the workplace so long as:

• There are no recent, significant controversies, fines or litigation regarding the company’ s political contributions or trade association spending; and

• The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibits coercion.

Vote AGAINST proposals to publish in newspapers and public media the company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.

 

Vote CASE-BY-CASE on proposals to improve the disclosure of a company's political contributions and trade association spending considering:

• Recent significant controversy or litigation related to the company’ s political contributions or governmental affairs; and

• The public availability of a company policy on political contributions and trade association spending including information on the types of organizations supported, the business rationale for supporting these organizations, and the oversight and compliance procedures related to such expenditures of corporate assets.

Vote AGAINST proposals barring the company from making political contributions. Businesses are affected by legislation at the federal, state, and local level and barring political contributions can put the company at a competitive disadvantage.

 

Vote AGAINST proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.

 

 

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Labor and Human Rights Standards

Generally vote FOR proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.

 

Vote CASE-BY-CASE on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:

• The degree to which existing relevant policies and practices are disclosed;

• Whether or not existing relevant policies are consistent with internationally recognized standards;

• Whether company facilities and those of its suppliers are monitored and how;

• Company participation in fair labor organizations or other internationally recognized human rights initiatives;

• Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;

• Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;

• The scope of the request; and

• Deviation from industry sector peer company standards and practices.

 

Sustainability Reporting

 

Generally vote FOR proposals requesting the company to report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:

 

• The company already discloses similar information through existing reports or policies such as an Environment, Health, and Safety (EHS) report; a comprehensive Code of Corporate Conduct; and/or a Diversity Report; or

• The company has formally committed to the implementation of a reporting program based on Global Reporting

• Initiative (GRI) guidelines or a similar standard within a specified time frame.

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International Corporate Governance Policy

 

 

2011 Updates

 

 

November 19, 2010

 

 

 

 

 

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Institutional Shareholder Services Inc.

 

 

 

 

 

 

Copyright © 2010 by ISS

 

 

 

 

 

www.issgovernance.com

 

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Notes:

• The definition of NED independence as proposed in the King III report should be used in those areas where it is stricter than ISS' international director classification criteria. For example, the shareholding level which compromises independence is set at 5 percent in King III, compared to 10 percent in ISS' policy. In addition, under King III, the receipt of any performance-related compensation compromises NED independence.

• ISS has a preference for a compensation committee to be wholly independent. However, to be consistent with King III, we accept a majority of independent NEDs on this committee.

 

 

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New Recommendation:

 

Vote AGAINST the top executive at listed companies that have controlling shareholders, where the board after the shareholder meeting does not include at least two independent directors based on ISS' independence criteria for Japan.

 

For companies with a three-committee structure, vote AGAINST outside director nominees who are regarded as non- independent. However, if a majority of the directors on the board after the shareholder meeting are independent outsiders, vote FOR the appointment of affiliated outsiders.

 

 

 

 

Rationale for Update: By taking a holistic approach, the updated policy is expected to encourage companies to build a better board with participation from outsiders who have knowledge of the company through business relationships, while the policy requires an overall board independence level to ensure the interests of independent shareholders are protected. With respect to the change in definition of listed subsidiaries, the current policy is only applicable to listed subsidiaries which have publicly traded parents. However, regardless of whether or not controlling shareholders are publicly traded companies, the protection of minority shareholders of controlled companies is critically important. The policy update is intended to better reflect this concept. On balance, these policy updates are generally in line with feedback received from

investors.

 

 

 

 

Corporate Governance Issue:

Election of Audit Committee Members (South Africa)

 

Current Recommendation: ISS does not currently have a policy regarding the election of audit committee members in the South African market.

 

Key Change: Address a new feature of South African annual general meetings ("AGMs") following recent legal changes. In line with the Companies Act 2008, consider the election of audit committees (or, where appropriate, individual audit committee members) primarily in the context of the independence of the committee.

 

New Recommendation:

 

Vote FOR the reelection of the audit committee and/or audit committee members unless:

• The committee includes one or more non-independent NEDs;

• The audit committee member is a non-independent NED;

• Members of the committee do not meet the further minimum requirements for audit committee membership to be outlined by the South African government;

• There are serious concerns about the accounts presented, the audit procedures used, or some other feature for which the audit committee has responsibility.

 

 

 

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Rationale for Update:

 

The Companies Act 2008 includes a requirement that audit committees be elected by shareholders at each AGM, and that such committees include independent NEDs only. Although the Act has yet to be formally implemented, some companies are already proposing AGM resolutions to satisfy the new requirement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Regarding ISS' current approach to deep-discount options, it was customary for Japanese companies to propose the grant of such options (which are equivalent to shares of restricted stock) in place of retirement bonuses whose payment was abolished. However, now that it has become more common for companies to propose deep discount options as part of regular compensation packages, the updated policy better reflects the status quo. In addition, the central issue of Japanese compensation is the lack of a link to shareholder value, and Japanese managers' holdings in their companies are usually limited. In light of this, the increased use of options as part of regular compensation packages is recommended. The updated policy sends the message that Japanese managers' interests should be more aligned with those of shareholders, by encouraging companies to give deep-discount options as part of regular compensation packages for managers, but with a vesting period that encourages long-term alignment.

 

On balance, these policy updates are generally in line with feedback received from investors.

 

 

 

 

Corporate Governance Issue:

Advisory Votes on Compensation Policy/Compensation Report (South Africa)

 

 

Current Recommendation: Vote compensation items on a CASE-BY-CASE basis.

 

Key Change: Highlights the ISS Global Principles on Executive Compensation and identifies those issues which are likely to lead to a recommendation against compensation-related items. This is particularly relevant as more South African companies put compensation policy resolutions to an advisory vote.

 

New Recommendation:

 

ISS Global Principles on Executive Compensation

 

The assessment of compensation should follow the ISS Global Principles on Executive Compensation, which underlie market-specific policies in all markets:

• Provide shareholders with clear, comprehensive compensation disclosures;

• Maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value;

• Avoid arrangements that risk "pay for failure;"

• Maintain an independent and effective compensation committee;

• Avoid inappropriate pay to non-executive directors.

Approve Compensation Policy/Compensation Report

 

ISS will evaluate management proposals seeking ratification of a company's compensation policy on a CASE-BY-CASE basis. In support of King III, ISS believes that seeking annual shareholder approval for a compensation policy is a positive corporate governance provision.

 

 

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When judging compensation policies or reports, ISS will generally recommend a vote AGAINST if the level of disclosure of the policy and/or its application is below what is required to make an informed judgment on the policy.

 

In the event of satisfactory disclosure, ISS will recommend a vote FOR the approval of the executive compensation policy unless two or more of the following issues apply (it may be appropriate to vote AGAINST on one issue if it has been identified as particularly serious):

 

• Large increases in fixed compensation have been implemented and have not been adequately explained.

• The company has made bonus payments but these have not been clearly linked to performance (including guaranteed bonuses or transaction bonuses).

• The company operates long-term incentive schemes (including matching shares) which do not have performance conditions attached for all or a substantial proportion of awards.

• The vesting period for long-term incentive schemes is set at less than three years.

• Long-term schemes include an element of retesting.

• Options can be granted at a discount to market value.

• The potential dilution under share incentive schemes is deemed excessive, and there are no mitigating circumstances (e.g., stringent performance measures)

• Executive directors have service contracts with notice periods which exceed one year.

• The company has made ex-gratia payments or one-off special awards to executives during the year which have not been adequately explained.

• Discretion has been used during the year in a manner not considered consistent with shareholder interests.

• The policy or the application of the policy is in any way not considered aligned with shareholder interests.

 

In circumstances where a company has demonstrated a significant shift in the right direction, it may be appropriate for ISS to support the compensation policy resolution, notwithstanding the presence of some historical issues of concern.

 

Failure to propose a resolution on executive compensation for shareholder approval may, over time, lead to an adverse vote recommendation on another AGM item, for example, the reelection of the chairman of the compensation committee.

 

Approve Share Incentive Scheme

 

ISS will evaluate management proposals seeking approval for a share incentive scheme on a CASE-BY-CASE basis.

 

When judging such items, ISS will generally recommend a vote AGAINST if the level of disclosure on the proposal is below what is required to make an informed judgment on the scheme.

 

In the event of satisfactory disclosure, ISS will recommend a vote FOR the proposal unless ONE or more of the following apply:

• Performance conditions do not apply, have not been disclosed, or are not considered sufficiently challenging or relevant.

• Performance conditions can be retested.

• Performance is measured over a period shorter than three years.

• The plan allows for option repricing or issue of options at a discount or backdating of options.

• The potential dilution is deemed excessive, and there are no mitigating circumstances (e.g., stringent performance measures).

• The scheme provides for potentially excessive individual reward or has no caps on individual participation.

• NEDs can participate in the scheme.

• The scheme is in any way not considered aligned with shareholder interests.

 

Proposals to amend a scheme will involve an assessment of the nature of the amendment.

 

 

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Rationale for Update: The new policy will clarify ISS' approach to assessing compensation-related items in South Africa. This is particularly relevant given that the King III report includes a recommendation that companies provide shareholders with a non-binding vote at the AGM on the executive compensation policy. It is expected that more companies will put these types of resolution forward for a shareholder vote; a number of such resolutions have already been included in AGM agendas in 2010.

 

Using the ISS Global Principles on Executive Compensation as a starting point, and taking into account best practice guidance outlined in King III and some common concerns of shareholders, the intention is to focus on disclosure and also highlight those issues which are likely to trigger negative vote recommendations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The proposed updates to ISS' policy strike a balance between (a) continuing to allow companies to have a degree of flexibility to issue shares and (b) moving to a position more closely in line with local shareholder expectations.

 

An additional provision to the policy has been added to capture concerns over those circumstances where a company may have used general authorities during the year in a manner not considered in shareholders’ interests.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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• The company substantially demonstrates that the separation of the roles of chair and CEO would have a negative effect on shareholder value;

• The company provides assurance that the chair/CEO would only serve in the combined role on an interim basis, with the intent of separating the roles within a given timeframe; or

• The company provides other compelling reasons to justify a combined chair/CEO.

In all of the above cases, the company would need to provide adequate control mechanisms on the board (such as a lead independent director, a high overall level of board independence, and a high level of independence on the board's key committees) in order for ISS to consider a favorable vote recommendation for a combined chair/CEO.

 

This policy will be applied to all core companies in European markets that propose the (re)election of a combined chair/CEO to the board, including cases where the chair/CEO is included in an election by slate.

 

Key Changes: Remove the exceptional circumstances presented under the first, second, and fourth bullet points above, and keep the "interim situation" presented under the third bullet point as the only circumstance justifying that the two positions not be split.

 

 

New Recommendation:

 

Vote AGAINST (re)election of a combined chair/CEO at core companies in European markets.

 

However, when the company provides assurance that the chair/CEO would only serve in the combined role on an interim basis (no more than two years), with the intent of separating the roles within a given time frame, considerations should be given to these exceptional circumstances. In this respect, the vote recommendation would be made on a CASE-BY-CASE basis. In order for ISS to consider a favorable vote recommendation for a combined chair/CEO to serve on an interim basis, the company would need to provide adequate control mechanisms on the board (such as a lead independent director, a high overall level of board independence, and a high level of independence on the board’s key committees).

 

This policy will be applied to all core companies in European markets that propose the (re)election of a combined chair/CEO to the board, including cases where the chair/CEO is included in an election by slate.

 

 

 

Rationale for Update: This policy amendment more precisely reflects ISS' actual policy application that is based on current market practice and gives special consideration to companies that publicly disclose their intention to make the combined chair/CEO an interim position and to separate the roles within a maximum time frame of two years. Combining the roles of chair and CEO may result in concentration of power and blurs the lines between the duties of the CEO versus the duties of the chair, thus posing a potential risk to shareholders. European markets have further moved toward broad acceptance of the separation of the chair and CEO roles, as reflected by general practice among European public companies, as well as the adoption of best practice recommendations to this end in local corporate governance codes and, therefore, the interim appointment has come to represent the only potentially acceptable explanation for a combination of the roles in Europe . The amended policy would be applied for all European markets.

 

 

 

 

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current committee, and there is no publicly available information indicating that this would no longer be the case for the new nominating committee.

 

 

Rationale for Update: The policy amendment is to bring Finnish policy in line with the rest of the Nordic region as the Finnish Code of Corporate Governance was updated in 2010 to allow for non-board participation in nominating committees. The Code has previously prohibited such arrangements. Following the financial crisis, the inclusion of non- board members (shareholders) is now more acceptable among the corporate governance community in a region where it already is market practice. Moreover, the updated Swedish policy addresses the board size and composition constraints faced by smaller companies by making the policy applicable only to Swedish companies on the MSCI-EAFE or local main index .

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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o     The potential dilution from equity-based compensation plans exceeds ISS guidelines (the dilution must not exceed 5 percent for mature companies or 10 percent for growth companies);

o     Any short- or long-term compensation plans do not include a maximum award limit. For example, in the Netherlands and the United Kingdom, we expect plans to include individual award limit;

o     There is not a clear link between a company's performance and share awards;

o     Long-Term Share Plans do not include sufficiently challenging performance criteria and vesting periods (a minimum three-year vesting period). Performance standards must be quantifiable and fully disclosed, with relative performance measures being preferred. However companies may choose targets other than relative financial measures provided that those measures are relevant to their business and an explanation is provided.

o     Share Option Plans or Share Plans do not contain acceptable vesting periods (a minimum three-year vesting period) or provide insufficient disclosure of:

•     The exercise/strike price (options);

•      Discount on grant (outside of market practice);

•      Performance criteria

o      Related-party transactions with a current company executive regarding post-mandate exercise of share- based plans (or an auditor's report including such a transaction) if the transaction implies an adverse impact on shareholders' interests or is not in line with good market practices;

 

• Severance payments in excess of 24 months pay;

• Severance payments should not exceed 12 months of fixed pay (in the United Kingdom);

• Severance pay should not exceed one year's fixed salary or two years if the executive is dismissed during his/her first term of office (in the Netherlands);

• Provision of stock option grants, or similarly structured equity-based compensation, to non-executive directors;

• The policy or plan is in breach of any other supplemental market specific ISS voting policies.

 

The above applies as supported by local market best practice standards and practices and in markets which operate a "comply or explain" regime, if no compelling reason/justification has been provided.

 

Non-Executive Director Compensation

 

Vote FOR proposals to award cash fees to non-executive directors unless the amounts are excessive relative to other companies in the country or industry.

 

Vote on non-executive director compensation proposals that include both cash and share-based components on a CASE-BY- CASE basis.

 

Vote on proposals that bundle compensation for both non-executive and executive directors into a single resolution on a CASE-BY-CASE basis.

 

Vote AGAINST proposals to introduce retirement benefits for non-executive directors.

 

Vote AGAINST non-executive director compensation if documents (general meeting documents, annual report) provided prior to the general meeting do not mention fees paid to non-executive directors.

 

Vote AGAINST non-executive director remuneration if the company intends to excessively increase the fees in comparison with market/sector practices, without stating compelling reasons that justify the increase.

 

Vote AGAINST proposals that provide for the granting of stock options, or similarly structured equity-based compensation, to non-executive directors.

 

 

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Key Changes: Strengthen the power of sanction in case of discretionary payments/pay for failure; establish the link between performance and actual pay; and include reference to market practice and disclosure with respect to severance payment and other compensation practices.

 

New Recommendation:

 

Preamble

 

The assessment of compensation follows the ISS Global Principles on Executive and Director Compensation which are detailed below. These principles take into account global corporate governance best practice.

 

The ISS Global Principles on Compensation underlie market-specific policies in all markets:

 

1. Provide shareholders with clear, comprehensive compensation disclosures;

2. Maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value;

3. Avoid arrangements that risk “pay for failure;”

4. Maintain an independent and effective compensation committee;

5. Avoid inappropriate pay to non-executive directors.

 

In line with European Commission Recommendation 2004/913/EC, ISS believes that seeking annual shareholder approval for a company's compensation policy is a positive corporate governance provision.

 

In applying the Five Global Principles, ISS has formulated European Compensation Guidelines which take into account local codes of governance, market best practice, and the Recommendations published by the European Commission. ISS analyzes compensation-related proposals based on the role of the beneficiaries and has therefore divided its executive and director compensation policy into two domains:

 

I. Executive compensation-related proposals; and

II. Non-executive director compensation-related proposals

 

 

Executive compensation-related proposals

 

ISS will evaluate management proposals seeking ratification of a company's executive compensation-related items on a CASE-BY-CASE basis, and will generally recommend a vote AGAINST a company's compensation-related proposal if such proposal fails to comply with one or a combination of several of the global principles and their corresponding rules:

 

1. Provide shareholders with clear and comprehensive compensation disclosures:

 

1.1 Information on compensation-related proposals shall be made available to shareholders in a timely manner;

1.2 The level of disclosure of the proposed compensation policy shall be sufficient for shareholders to make an informed decision and shall be in line with what local market best practice standards dictate;

1.3 Companies shall adequately disclose all elements of the compensation, including:

1.3.1 Any short- or long-term compensation component must include a maximum award limit.

1.3.2 Long-term incentive plans must provide sufficient disclosure of (i) the exercise price/strike price (options); (ii) discount on grant; (iii) grant date/period; (iv) exercise/vesting period; and, if applicable, (v) performance criteria.

1.3.3 Discretionary payments, if applicable.

 

2. Maintain appropriate pay-for-performance alignment with emphasis on long-term shareholder value:

 

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2.1 The structure of the company's short-term incentive plan shall be appropriate.

2.1.1 The compensation policy must notably avoid guaranteed or discretionary compensation.

2.2 The structure of the company's long-term incentives shall be appropriate, including, but not limited to, dilution, vesting period, and, if applicable, performance conditions.

2.2.1 Equity-based plans or awards that are linked to long-term company performance will be evaluated using ISS' general policy for equity-based plans; and

2.2.2 For awards granted to executives, ISS will generally require a clear link between shareholder value and awards, and stringent performance-based elements.

2.3 The balance between short- and long-term variable compensation shall be appropriate

2.3.1 The company's executive compensation policy must notably avoid disproportionate focus on short-term variable element(s)

 

3. Avoid arrangements that risk “pay for failure”:

 

3.1 Severance pay agreements must not be in excess of (i) 24 months' pay or of (ii) any more restrictive provision pursuant to local legal requirements and/or market best practices.

3.2 Arrangements with a company executive regarding pensions and post-mandate exercise of equity- based awards must not result in an adverse impact on shareholders' interests or be misaligned with good market practices.

3.3 The board shall demonstrate good stewardship of investor's interests regarding executive compensation practices.

3.3.1 There shall be a clear link between the company's performance and variable awards.

3.3.2 There shall not be significant discrepancies between the company's performance and real executive payouts.

 

4. Maintain an independent and effective compensation committee:

 

4.1 No executives may serve on the compensation committee.

4.2 In certain markets the compensation committee shall be composed of a majority of independent members, as per ISS policies on director election and board or committee composition.

 

In addition to the above, ISS will generally recommend a vote AGAINST a compensation-related proposal if such proposal is in breach of any other supplemental market-specific ISS voting policies.

 

Non-Executive Director Compensation

 

5. Avoid inappropriate pay to non-executive directors.

 

ISS will generally recommend a vote FOR proposals to award cash fees to non-executive directors, and will otherwise:

 

Recommend a vote AGAINST where:

 

• Documents (including general meeting documents, annual report) provided prior to the general meeting do not mention fees paid to non-executive directors.

• Proposed amounts are excessive relative to other companies in the country or industry.

• The company intends to increase the fees excessively in comparison with market/sector practices, without stating compelling reasons that justify the increase.

• Proposals provide for the granting of stock options, or similarly structured equity-based compensation, to non- executive directors.

• Proposals introduce retirement benefits for non-executive directors.

 

2011 European Corporate Governance Policy Updates

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And recommend a vote on a CASE-BY-CASE basis where:

• Proposals include both cash and share-based components to non-executive directors.

• Proposals bundle compensation for both non-executive and executive directors into a single resolution.

 

Equity-based compensation Guidelines

 

ISS will generally recommend a vote FOR equity based compensation proposals for employees if the plan(s) are in line with long-term shareholder interests and align the award with shareholder value. This assessment includes, but is not limited to, the following factors:

 

The volume of awards transferred to participants must not be excessive: the potential volume of fully diluted issued share capital from equity-based compensation plans must not exceed the following ISS guidelines:

 

• The shares reserved for all share plans may not exceed 5 percent of a company's issued share capital, except in the case of high-growth companies or particularly well-designed plans, in which case we allow dilution of between 5 and 10 percent: in this case, we will need to have performance conditions attached to the plans which should be acceptable under ISS criteria (challenging criteria);

 

The plan(s) must be sufficiently long-term in nature/structure: the minimum vesting period must be no less than three years from date of grant;

 

The awards must be granted at market price. Discounts, if any, must be mitigated by performance criteria or other features that justify such discount.

 

If applicable, performance standards must be fully disclosed, quantified, and long-term, with relative performance measures preferred.

 

 

Rationale for Update:

 

According to our 2010-2011 Policy Survey, a substantial majority of both investors and issuers cited performance criteria and the pay-for-performance link as being among the three biggest concerns in evaluating long-term incentive plans. An overwhelming majority of investor respondents indicated that pay-for-performance disconnects (increasing compensation with declining performance) could warrant a negative vote. A majority of investor respondents also cited that disclosure issues (inconsistent and vague disclosure, especially surrounding performance) could warrant a negative vote.

 

For long-term investors, it is of utmost concern that a company's executive compensation system provides a clear link between pay and sustainable, long-term performance. When determining whether a company's compensation system appropriately links pay to performance, investors will naturally look at both the company's stated compensation principles as well as its application of those principles in the past, in order to assess the likelihood that the company's pay principl es will be applied consequently in future years. When a company's disclosure gives the appearance that its compensation practices are not in line with its stated policy, the result is that the credibility of the entire compensation policy is thr own into question. Therefore, if disclosure is such that an investor could reasonably conclude that the company's pay allocations deviate significantly from its stated compensation policy, then ISS may make a negative vote recommendation.

 

Moreover, the new policy takes into account local best practice or legal requirements that are stricter than ISS' guidelines, and subsequently eliminates reference to market-specific policies. The policy on severance pay agreements still maintains the upper limit of 24 months' pay (both fixed and short-term variable), but otherwise refers to more stringent local provisions, if any, e.g., the Netherlands or Belgium as of 2011, instead of explicit carve-outs.

 

 

 

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2011 European Corporate Governance Policy Updates

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2011 European Corporate Governance Policy Updates

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Item 8. Portfolio Managers of Closed-End Management Investment Companies.

 

(a)(1) Portfolio Manager

 

As of the filing date of this report, the Blue Chip Value Fund is managed by the Value Research Team at Denver Investments. Mr. Kris Herrick, CFA, is the Director for this investment team. He works closely with four analysts, Mr. Mark Adelmann, CFA, CPA (Inactive), Mr. Troy Dayton, CFA, Mr. Derek R. Anguilm, CFA and Ms. Lisa Ramirez, CFA (the “Team”). These individuals have each been assigned specific industries to focus their research efforts. The Team is further supported by additional analysts who all may recommend purchase and sell decisions for the Fund. Every new investment is presented to the Team, which reviews investment ideas to determine whether that potential investment is attractive and compatible with the Fund’s investment objective. The Team typically seeks to reach consensus on all investment decisions.

 

Kris Herrick, CFA, Partner, Director of Value Research and Portfolio Manager, joined Denver Investments in 2000. Prior to joining the firm, he was an Equity Research Analyst with Jurika and Voyles (since 1997). He has 14 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

 

Mark Adelmann, CFA, CPA (Inactive), Partner and Portfolio Manager/Analyst, joined Denver Investments in 1995. He has 32 years total investment experience and has been the Fund’s portfolio manager since June 3, 2002.

 

Derek Anguilm, Partner and Portfolio Manager/Analyst, joined Denver Investments in 2000.  Prior to joining the firm he was with EVEREN Securities (since 1999). He has 12 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

 

Troy Dayton, CFA, Partner and Portfolio Manager/Analyst, joined Denver Investments in 2002. Prior to joining the firm, he was an Equity Research Analyst with Jurika and Voyles (since 2001) and Dresdner RCM Global Investors (since 1998). He has 15 years total investment experience and has been a member of the Fund’s portfolio management team since December 1, 2003.

 

Lisa Ramirez, CFA, Partner and Portfolio Manager/Analyst, joined Denver Investments as a portfolio administrator in 1993. She became an analyst on the Mid-Cap Growth team in 1997 and joined the Value team in 2005.  She has 18 years total investment experience and joined the Fund’s portfolio management team on April 30, 2009.

 

(a)(2) Other Accounts Managed

 

As of the most recently completed fiscal year end (December 31, 2010), the following table summarizes the other investment activities of each portfolio manager.

 

 

Portfolio Manager:	Herrick	Adelmann	Anguilm	Dayton	Ramirez
Registered Inv Companies
Assets	$889,079,283	$887,493,544	$887,493,544	$887,493,544	$887,493,544
# of Accounts	8	7	7	7	7
Performance Based
Assets	$18,068,107	$18,068,107	$18,068,107	$18,068,107	$18,068,107
# of Accounts	1	1	1	1	1
Other Pooled Accts
Assets	$67,166,013	$67,166,013	$67,166,013	$67,166,013	$67,166,013
# of Accounts	1	1	1	1	1
Performance Based
Assets	$0	$0	$0	$0	$0
# of Accounts	0	0	0	0	0
Other Accts
Assets	$829,002,378	$829,002,378	$829,002,378	$829,002,378	$829,002,378
# of Accounts	322	322	322	322	322
Performance Based
Assets	$242,750,631	$242,750,631	$242,750,631	$242,750,631	$242,750,631
# of Accounts	2	2	2	2	2
Grand Totals
Assets	$1,785,247,674	$1,783,661,935	$1,783,661,935	$1,783,661,935	$1,783,661,935
# of Accounts	331*	330*	330*	330*	330*

 

* Totals include 259 accounts within separately managed account (SMA) wrap programs which Denver Investments serves as a portfolio manager.

 

 

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Potential material conflicts of interest that may arise when a portfolio manager has day-to-day management responsibilities with respect to other accounts in addition to the Fund, include conflicts relating to the allocation of limited investment opportunities, the order of executing transactions when the aggregation of the order is not possible, personal investing activities, differences in advisory fee arrangements, structure of portfolio manager compensation and proxy voting of portfolio securities. While there can be no guarantee, Denver Investment Advisors LLC believes that the controls and oversight relating to these potential material conflicts of interest involving the Fund and its other managed funds and accounts is effective.

 

(a)(3)  Manager Compensation

 

Denver Investments is a limited liability company with “members” or “partners” as the owners of the firm. The compensation structure for partners versus employees differs such that a separate description of portfolio managers’ compensation is required for those portfolio managers who are partners and those who are not partners.

 

As a portfolio manager and partner of Denver Investments, the primary compensation comes from a base salary and a predetermined percentage of distributed profit. Additionally, the management committee of Denver Investments may award an incentive compensation bonus to partners who significantly exceed expectations over an extended period. The criteria for the incentive compensation pool include the following factors: investment performance, growth and/or retention of assets, profitability and intangibles. There is a composite of similarly managed accounts for each investment style at Denver Investments, and the Fund is included in the appropriate composite. The performance criteria emphasizes pre-tax long-term (3-5 year when available) results of the composites compared to the applicable benchmark index and peer group data, rather than any specific Fund or account result.

 

Non-partner portfolio manager compensation consists of a base salary, discretionary firm profit sharing and predetermined potential bonus. A portion of the bonus is determined by the overall pre-tax performance of the investment management accounts managed by the non-partner portfolio manager (including the Fund) in comparison to the applicable benchmark index and peer group data in the same manner as described above for partners. The remaining portion of the bonus is subjective, based primarily on the portfolio manager’s contributions to the investment process, stock selection and teamwork.

 

Both partner and non-partner portfolio managers can also participate in Denver Investments’ defined contribution retirement plan, which includes normal matching provisions and a discretionary contribution in accordance with applicable tax regulations.

 

 

 

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(a)(4)Equity Securities in the Registrant

 

The table below identifies ownership in the Blue Chip Value Fund by each portfolio manager as of December 31, 2010:

 

 

 

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.  

 

Not applicable.

 

Item 10. Submission of Matters to a Vote of Security Holders. 

 

The Registrant’s By-Laws were amended effective September 7, 2010 to, among other things, clarify procedures for and adjust the timing of and information that stockholders must provide when proposing director nominations at annual and special stockholder meetings.    

Item 11. Controls and Procedures.

 

(a)  The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document.

 

(b)  There was no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

Item 12. Exhibits.

 

(a)(1)   The code of ethics that applies to the registrant’s principal executive officer and principal financial officer is attached hereto as Ex.12.A.1. 

 

(a)(2)   Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached hereto as Ex99.CERT.

 

 

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(a)(3)   Not applicable.

 

(b)        A certification for the registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached hereto as Ex99.906CERT.  The certification furnished pursuant to this paragraph is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SIGNATURES

 

            Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Blue Chip Value Fund, Inc.

 

By:       /s/ Todger Anderson

            Todger Anderson

President and Chief Executive Officer

 

Date:    March 7, 2011

 

            Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 

           

By:       /s/ Todger Anderson

            Todger Anderson

President and Chief Executive Officer

 

Date:    March 7, 2011

 

By:       /s/ Jasper R. Frontz

            Jasper R. Frontz

Treasurer and Chief Financial Officer

           

 

Date:    March 7, 2011