T. Rowe Price¹

Policy Statement on Corporate Responsibility

Investment risks and opportunities take many forms.

T. Rowe Price is a global investment management firm serving a diverse set of clients and employing many distinct investment strategies. The portfolios we manage share a common objective: to earn superior risk-adjusted returns for our clients over the long term.

Change is constant, and information is abundant.

The complexity of global markets continues to rise. One of our greatest challenges is balancing our desire to remain committed to investment strategies that have been successful through long market cycles, yet remain flexible enough to adapt our processes to the markets' changing dynamics.

One example of an important change taking place in financial markets today is in the realm of corporate responsibility. There has been a dramatic increase in the availability of information about corporations' governance, environmental and corporate citizenship philosophies and practices. As long-term investors, we strive to understand how these corporate policies might affect our portfolio companies, both now and in the future. How might these factors affect a company’s reputation or brand, and how is the competitive landscape changing in the face of particular environmental or governance challenges?

These questions do not have easy answers, but we believe they should be given due consideration because of their potential to affect the long-term sustainability of a company. In addition, the decisions a company makes about governance and resource allocation influence the risk premium the market assigns to the enterprise. Academic studies have shown a link, for instance, between certain corporate governance structures and relative performance, and between robust rights for shareholders and premium valuations.²

What is extra-financial risk?

T. Rowe Price's investment professionals assess a considerable number of factors when deciding whether to buy or sell a security for a particular portfolio. Many of these factors are not found in the financial statements. While dissecting financial reports, building earnings models and projecting a company's revenue growth and cash flow are critical steps in our process, so too is evaluating the many intangible elements of the business that are relevant for the long-term sustainability of a given industry or company, including:

Together with our financial assessment of a company, we think about risk as the amalgamation of these non-financial factors.

Risk and opportunity: Two sides of the same coin.

Of course, not all of our analysis centers around the risk profile of an enterprise. We also seek to understand the range of potential opportunities that a business has when deciding whether the risk/reward ratio is attractive for a given investment. We believe companies that engage in long-term strategic planning, including the in-depth analysis of extra-financial factors such as environmental impact, benefit from that experience. Looking internally to assess their own mission and purpose, to think about how the competitive landscape is evolving over long periods of time, and to consider how changes in the broader community might affect the company are all processes that improve the alignment of the company's direction with the interests of long-term shareholders. Furthermore, when a company’s radar is tuned in to long-term societal shifts, it is better able to create new opportunities to grow.

Concerns over extreme weather events and the consequences of climate change certainly bring a new range of risks to many of our portfolio companies, but the global effort to reduce certain industries' environmental impact also has created new investment opportunities. In response, last year we dedicated an analyst to evaluating investment opportunities in solar, wind and other alternative energy sources. This is one way that T. Rowe Price has approached the changing landscape of investment risks and opportunities.

Another example of our firm taking additional steps to analyze extra-financial risk is with respect to investments with ties to certain troubled regions. For example, we enhanced our ability to monitor potential risks associated with our clients' investments in companies with business ties to Sudan. We discussed with management teams their companies’ operations in the region to better understand their level of involvement. We retained a third-party research provider with expertise in screening for socially responsible investments to assist our investment staff in identifying companies with the most significant exposure to Sudan. In the second half of 2007, after carefully considering the business prospects, relative valuations and the potential risks that certain investments with ties to Sudan could present for our firm's clients, we decided that these risks outweighed the potential benefits, and we removed a select group of securities from our clients' portfolios. Later, we initiated a more formal implementation of our policy to refrain from investing in certain securities that, in our estimation, pose high risk due to their ties to the Sudanese government and its connection to human rights abuses. Determining when a particular security poses too much risk is a highly subjective and fluid process, and we may change our thinking about this particular risk factor in the future. However, at the present time, we believe excluding certain companies from consideration for investment in our clients' portfolios best serves their interests, given our evaluation of the risk profiles of these investments.

Corporate governance is another area where our investment of resources and our expertise pay dividends for our clients because of our ability to identify risks and opportunities in our portfolio companies' governance practices. Certain governance structures create risk factors that may impede our ability to reach our investment goals, so we have made a significant investment in identifying such factors and addressing them. We have a proprietary database for analyzing and recording proxy votes, for example. We also have a global corporate governance specialist on our investment staff who, in concert with a senior member of our legal team, works to enhance our ability to focus on corporate responsibility issues as part of our investment research process.

Market participants have diverse definitions of risk.

Broadly speaking, identifying non-financial risk within the environmental, social or governance realm is a very subjective and dynamic process. Each of our investment professionals, while taking these factors into account, defines their potential for risk and reward within his or her own context of industry knowledge, experience and definition of materiality.

Thanks to the trust our clients have placed in us, T. Rowe Price portfolios hold significant ownership stakes in many of the world's leading companies. We believe our responsibilities as diligent investors do not cease with the decision to purchase a security. We maintain regular dialogue with the managements of our portfolio companies, and where we find areas of concern—whether in their financial or non-financial practices—we raise those concerns with them. After many years of frequent and intense dialogue with our portfolio companies, we have observed that companies in many parts of the world are more responsive today to investors' efforts to engage them in discussions about their governance practices.

Vigilance is at the center of our investment process.

The constant reassessment of the risks and opportunities in our clients' portfolios is a key driver of our long-term investment performance. As more information becomes available about the full complement of extra-financial risks facing our portfolio companies, we continue to invest in resources that can gather such information and help us analyze it. Then, we adapt our research process to incorporate these important risks and opportunities into our thinking about each investment, always mindful of our objective to select superior long-term investments for our clients.