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1 Pensioenfonds PNO Media Engagement report 1 010

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3 This report contains a summary of the responsible ownership activities undertaken by EOS on behalf of PNO Media. It covers significant themes that have informed some of our intensive engagements with companies over the past quarter. The report also provides information on our voting decisions and the steps we have taken to promote global best practice, improvements in public policy and collaborative work with other shareholders. Contents 02 Engagement Engagement by region and issue 04 Governance: Business strategy and board structure Strategic engagements 06 Governance: Infineon AG Improving corporate governance at the company and market level 08 Social and ethical: Troubled regions Importing phosphate from the Western Sahara 10 Public policy work in South Asia Promoting better regulation and enhancing best practice 12 Social and ethical: Supply chain child labour Promoting best practice in the cocoa industry 14 Public policy and best practice Protecting and enhancing value by promoting better regulation 18 Voting overview How we voted 19 About EOS EOS Public Engagement Report Q

4 Engagement by region Over the last quarter we engaged with 42 companies held in PNO Media s portfolios on a range of social, environmental and governance issues. EOS holistic approach to engagement means that we will typically engage with companies on more than one issue simultaneously. The engagements included in these figures are in addition to our discussions with companies around voting matters. Africa and Middle East We engaged with one company over the last quarter. Americas We engaged with six companies over the last quarter. Asia We engaged with 16 companies over the last quarter. Europe We engaged with 10 companies over the last quarter. UK We engaged with nine companies over the last quarter. Global We engaged with 42 companies over the last quarter. Shareholder communications Environmental Social and ethical Risk management Business strategy Governance Remuneration 02 EOS Public Engagement Report Q1 2010

5 Engagement by issue A summary of the issues on which we engaged with companies over the last quarter is shown below. Social and ethical Social issues featured in 23% of our engagement over the last quarter. Employee relations Community relations Health and safety Supply chain Operations in troubled regions Corporate culture Munitions manufacture Political risk management Other ethical Environmental Environmental issues featured in 11% of our engagement over the last quarter. Climate change/carbon intensity Water stress Oil sands Forestry Other environmental Other engagement Business strategy featured in 18% of our engagements over the last quarter. Remuneration featured in 13% of our engagements over the last quarter. Risk management featured in 8% of our engagements over the last quarter. Shareholder communications featured in 1% of our engagements over the last quarter. Governance Governance issues featured in 26% of our engagement over the last quarter. Accounting or auditing issues Board structure Related party transactions Succession planning Separation Chair/CEO Other governance EOS Public Engagement Report Q

6 Governance: Business strategy and board structure Strategic engagements Many of EOS most successful engagements combine discussions of business strategy and structural governance issues. Statistics Number of companies engaged with on strategic matters this quarter: 57 Africa/Middle East 0 Americas 0 Asia 23 Europe 22 UK 12 Number of significant steps forward in strategic/governance engagements this quarter: 66 Africa/Middle East 1 Americas 5 Asia 26 Europe 17 UK 17 Includes only companies which in this quarter have made substantive strategic or major governance changes. Overview EOS' holistic approach to engagement combines discussions on business strategy and risk management, including social and ethical risks, with structural governance issues. Our engagements fill the gap left by the investment industry s tendency to focus on the shortterm. The result of this tendency is that management too often goes unchallenged in its approach to the long-term future of its business and there is minimal pressure for change. EOS assesses and engages with underperforming companies from a long-term perspective, asking questions which encourage management and boards to think afresh to overturn long-running periods of underperformance. This proven approach is often successful in adding value or ending destruction of value. Business strategy is also a key feature of other engagements such as those highlighted elsewhere in this report. We are generally most successful in achieving change on environmental, social and other matters where we lead the conversation from a business perspective and focus on these issues as risks to the company s strategic positioning. Companies can become locked into historic patterns where they are overdue for refreshment and new perspectives on the board. Injecting new thinking at the head of the company an independent chair or change of CEO is frequently the key to unlocking change and driving renewed operational performance, creating long-term value for shareholders. Engagements on governance and business strategy may require a series of meetings over months and years. It takes time for board changes to generate the business and strategic changes which improve long-term performance. 04 EOS Public Engagement Report Q1 2010

7 Highlighted sample engagements We met with both the chair and the senior independent director from a leading company from Africa/Middle East to discuss the shape of the board and skills necessary to take the business forward successfully. We have been engaging with the company at this level for some years and have been pleased to see a reshaping of its portfolio of businesses, but we have been disappointed by a lack of development of the board to reflect the changing needs of the company. We are heartened that this is now changing. We also discussed changes to the company s remuneration structures to improve the alignment of interests. We saw a major step forward in our engagement with a large media company in the Americas. We were able to withdraw a shareholder resolution we had proposed seeking the separation of chair and CEO roles following significant positive changes to the way in which the company structures its governance, in particular an important enhancement of the status and role of the lead independent director. Our concerns about the company were triggered by ongoing slowness to adapt its business model to market developments, and in particular a failure in one of its key businesses to deliver appropriate quality products to clients, which is now leading to regulatory reforms to which the company is struggling to respond. We are using the dialogue with the chair we have gained through the shareholder resolution process to address these underlying business and strategic issues. We met with the chair of one of Europe s leading banks to discuss its mix of businesses, its approach to regulatory reforms and the new structure of the industry overall, and also remuneration and governance matters. A focus on culture led to helpful dialogue about the approach of teams of staff and the bank s incentivisation responses beyond simple pay, and the fit of the various businesses within the bank. We tested the scope for the different businesses to succeed independently and the level of interdependence, particularly in terms of capital adequacy. We talked through remuneration from the high level of compensation ratios down to the cultural impacts of the checks and balances inserted into the newly proposed structure, challenging whether these checks and balances are being applied deep enough into the organisation. We maintained our dialogue with the chair of a leading UK IT company on strategy, board structure and reporting. We continue to be concerned that the company s accounting policies obscure its underlying performance rather than reveal it, and we urged moves towards better and more transparent reporting so that investors can have clearer insight into the positive underlying performance that the chair assures us is in place. We again linked this issue to the need for board refreshment, seeking the appointment of further directors, including one with sufficient financial, IT and UK market experience to assist the board to enhance its approach and to reassure the market more effectively. We pursued our engagement with a leading financial institution in Asia on strategy and governance matters. We were concerned by the institution s aggressive growth model and gained reassurance that this is driven by appropriate profitability and shareholder value metrics rather than scale alone, and were also able to test its ongoing capital adequacy. We also raised concerns regarding governance: while the board is ostensibly independent, our concerns about effectiveness were raised in particular by issues around succession planning for the chair. We urged governance reforms at both the holding company itself and at its major operating subsidiary, in order to build investor and regulator confidence that the right skills and level of challenge are in place within the boardroom. EOS Public Engagement Report Q

8 Governance: Infineon AG Improving corporate governance at the company and market level Following an intensive engagement with Infineon about the composition and performance of its Supervisory Board, we took the unusual step in January of proposing an alternative, shareholder candidate for election to the Supervisory Board at the company s AGM in February. This has a signal effect for corporate Germany, says Henning Gebhardt, DWS s head of German equities. In future, supervisory boards will have to think twice whom they propose as chairman. They will more likely consult shareholders during the selection process. Financial Times, 22 January 2010 Overview The candidate proposed by EOS won very strong public support from a number of international and German investors as well as the proxy advisory firms. As a result of EOS initiative, several weeks before the AGM, the company s candidate for the Supervisory Board offered to step down after only one year if elected, and promised to identify a suitable independent successor during that period in consultation with major shareholders. This significant concession meant that our principal engagement objective the further renewal of the Supervisory Board, particularly at the top would be achieved within a year. Moreover, the AGM was the first time at a major German company that shareholders had put forward their own candidate for election to the Supervisory Board. The result has been much analysis and debate about Supervisory Board nomination practice in Germany. Our engagement with Infineon and the discussion around it will encourage more German companies to involve shareholders through appropriate mechanisms in the nomination of candidates for election to the Supervisory Board going forward. Our engagement with Infineon renewal at the top of the company We have long held concerns about the corporate governance at Infineon AG, a German DAX 30 company. Most importantly, delays in strategic decisions or in their implementation as well as apparent mistakes with regard to Management Board appointments are likely to have contributed to a significant destruction of value since Infineon s listing in Due to its responsibility pursuant to relevant law and the company s by-laws for strategic and investment decisions and in particular the appointment of Management Board members, the Supervisory Board is ultimately responsible for this value destruction. EOS has discussed these concerns since October 2008 with members of the Supervisory Board and made constructive proposals with regard to addressing the apparent problems and regaining investors confidence. Given the apparent failure of Infineon to recognise the seriousness of concerns amongst investors, we filed a counterproposal on behalf of EOS clients at the AGM in February 2009 regarding the discharge of the Supervisory Board s work in the financial year EOS Public Engagement Report Q1 2010

9 The support for our counterproposal of close to 50% of the votes cast showed shareholders lack of confidence in the work of the current board members. Moreover, it was a clear demand for extensive renewal of the Supervisory Board at the AGM in Unfortunately, the dialogue with Infineon following the AGM in 2009 once again did not prove fruitful, particularly with regard to the candidates proposed for election to the Supervisory Board at the AGM in February In fact, the Supervisory Board seemed to ignore the wishes of shareholders by proposing four of its members for re-election at the 2010 AGM. The proposal to re-elect a former Siemens executive was particularly problematic as he has been on Infineon s Supervisory Board since 1999 and was proposed as chairman. Hermes EOS strongly believed that a new start at Infineon required further renewal particularly at the top of the Supervisory Board. In January 2010 EOS therefore proposed a very experienced and qualified alternative candidate for election to Infineon s Supervisory Board on behalf of its clients. This was the first time that shareholders had presented a candidate for election to the Supervisory Board of a major German company and as such we made a significant contribution to the development of responsible ownership practice in Germany. In the week after filing our proposal we won very strong public support from a number of international and German investors as well as the proxy advisory firms for our initiative. As a result of the pressure that presenting a shareholder candidate put on Infineon, the company s candidate for the Supervisory Board s chairmanship offered in late January to step down after only one year if elected generally Supervisory Board members are elected for five years in Germany and promised to identify a suitable successor from the outside during that period in consultation with major shareholders. This effectively meant that there will be further pro-active consultation with shareholders with regard to the Supervisory Board s composition and most importantly a new chairman from outside the company within a year. In light of these significant concessions by the company, we are very pleased with the achievements of our intensive engagement with Infineon over the last 18 months, in spite of the fact that our candidate did not get the support of the majority of shareholders at the AGM. It would seem that Infineon s pro-active dialogue with key investors and particularly the wide-ranging concessions the company made ahead of the AGM significantly influenced shareholders thinking and as such explain the voting result. We plan to work constructively with the new Supervisory Board and its chairman going forward in order to contribute to a fresh start and a smooth transition at the top of the company at the AGM in Implications of our engagement for the German market involvement of shareholders in Supervisory Board nomination process We believe that the implications of our engagement with Infineon on Supervisory Board nomination practice in Germany may be even more significant than the positive changes achieved at the company itself. Indeed, the effect of our engagement on German market practice has been described by some commentators as a sea change in German corporate governance. Our engagement with Infineon has established the important principle that Supervisory Boards should involve significant shareholders in the nomination process in an appropriate form. In our Corporate Governance Principles for Germany, we strongly encourage German companies to involve shareholders through appropriate mechanisms in the nomination of candidates for election to the Supervisory Board. Whilst we recognise that there are legal limits to this in Germany, there are a number of mechanisms, such as a consultation of shareholders with regards to the criteria that should be taken into consideration when assessing the composition and refreshment of the Supervisory Board, which would seem to be compatible with the relevant German law. Indeed, a number of German companies already communicate with shareholders with regard to Supervisory Board composition and nomination. Given the debate of the nomination process around the Infineon AGM since the beginning of the year, we believe that more German companies will take this important aspect of corporate governance into account going forward. Overall, we are very pleased to have made a significant contribution to the development of corporate governance practice at Infineon and in the wider German market through our intensive engagement with the company. EOS Public Engagement Report Q

10 Social and ethical: Troubled regions Importing phosphate from the Western Sahara A combination of political conflict and reputed infringement of human rights prompted EOS to engage with companies importing phosphates from the Western Sahara region on their sourcing of this imported mineral. Statistics Overview Number of companies engaged with: 6 Reassurance gained: 4 Number of companies where substantive change sought: 2 Number of these showing progress so far: 2 A principal objective of our engagement activities with affected companies has been to ensure that they are not challenged in reputational and operational terms. 8 EOS Public Engagement Report Q The Western Sahara is an area of North Africa largely under Moroccan control. However the legal status of the territory is disputed by Morocco and the Polisario Front, a rebel national liberation movement. The area is considered a non self-governed territory by the United Nations and it has been the subject of UN-sponsored negotiations and discussions by the US Senate in an attempt to address this issue. The trade in phosphates by companies which are exporting this commodity from the region is viewed to be a violation of international law, as Morocco has no legal claim to the Western Sahara and its natural resources. With trade and economic activity being controlled by the Moroccan government NGOs have also reported human rights violations and lack of evidence to indicate that the exports have benefited local communities. EOS has been actively discussing the sourcing of phosphate from the occupied Western Sahara region with affected companies from across the world. Such importing is in conflict with the right to self-determination and more specific international norms prohibiting the exploitation of natural resources of non-self-governing territories unless carried out in full respect of the interests and need of their people. In our engagement work, we have encouraged companies to make an assessment of the rewards and potential risk to shareholder value arising from their continued presence in this region. Advocating the extent to which the company could seek an alternative source of material and demonstrate value-add to the local community.

11 Issues and companies With the alleged suppression of the indigenous population and a lack of humanitarian support from companies to underpin their commitment to local communities, companies maintaining a presence in the region are exposed to the reputational risk of implication in the possible suppression of local people. In addition the potential risk of social unrest creates the threat of disruption to essential supplies to companies for a shorter or longer period of time. In the case of a political resolution any new regime may decide to exclude companies for having been involved with the former leadership. For the companies involved in exporting phosphates from the region, this is not a sustainable position. EOS' efforts have therefore focused on exploring the extent to which those companies are ensuring their activities are responsible. In the absence of such efforts, companies risk dislocation of supply, either through renewed conflict or through not being a welcome partner when the territory does become self-governing. A principal objective of our engagement activities with affected companies has been to ensure that they are not challenged in reputational and operational terms by taking supplies from the region and that they have assessed such implications fully. Throughout these engagements we have emphasised the importance of board level oversight of risk assessments, particularly around political and reputational risks. We have also encouraged companies to communicate openly with shareholders to demonstrate how these associated risks are managed and mitigated. As another means of limiting associated reputational risks, we encourage companies to engage with local communities through community programmes to demonstrate the positive impact their presence in the region can have for indigenous populations. This is in addition to promoting the implementation of the voluntary principles on security and human rights, which may also help to manage risks. At the same time, we have encouraged companies to explore a viable alternative source for phosphate and to consider the long-term sustainability of sourcing vital materials exclusively from one particular geography, and the implications of potential interruptions to supply. Our engagement with companies on this issue has included an assessment of the extent to which companies source phosphate from this area and the role this particular rock plays in the companies' overall production requirements. Our engagement identified that some companies are potentially exposing themselves to a disproportionate amount of risk from sourcing a minimal quantity of phosphate from Western Sahara relative to their overall requirements. Where companies social, ethical and environmental reporting has neglected to take account for such issues, EOS has emphasised the need for disclosure to outline the reasons for sourcing Western Sahara phosphate. A number of companies in EOS engagement programme have shared their intention to cease procuring materials from Western Sahara. We were able to advocate that public disclosure would help to dissipate any legacy issues which might compromise the company s reputation. The majority of companies we engaged with were largely responsive to addressing this issue and many were aware of the issues and the need to communicate fully with all stakeholders on their mitigation programmes. Historically some companies having been resistant to dialogue with investors on this issue. An influencing factor in companies renewed responsiveness to this issue is the withdrawal of one of the world s biggest fertiliser company from the Western Sahara on ethical grounds. EOS' engagement has been particularly successful in influencing one company to invest in new technology which will enable it to use phosphate rock from sources other than Western Sahara. This will enable the company to source phosphate from a greater range of sources without having negative impacts on the fertiliser it produces. The wider business advantages in broadening the potential supply base will give the company greater negotiating power with suppliers. By phasing out the company s import and dependency on phosphate from Western Sahara, it will ensure that the human rights of all involved in its supply chain are respected. Companies identified by NGOs as being exposed in this area include: Potash Corporation (Canada), Incitec Pivot (Australia), BASF (Germany), Yara International (Norway), Mosaic (US) and Wesfarmers (Australia). EOS Public Engagement Report Q

12 Public policy work in South Asia Promoting better regulation and enhancing best practice EOS has been actively involved in public policy work in South Asia with its local partner Corston-Smith Asset Management. With local regulators initiatives to improve corporate governance standards in the markets, we have developed our relationships with them to promote best practice and to enhance the value of our clients holdings in the long-term. Whilst we note that there is yet room for improvement in regulation to bring it further in line with best practice, we have welcomed efforts by local regulators and initiatives to improve corporate governance standards in South Asia. Overview EOS takes a close interest in matters of regulation because they set the context for the exercise of our clients rights as part-owners of the companies in which they invest. We seek to safeguard our clients current rights and also to enhance the transparency and accountability of companies and their directors to their long-term owners. To minimise risk to our clients international holdings, we believe that the markets in which they invest should be transparent and efficient and that regulators should ensure that their actions encourage these aims to work in practice. EOS has been actively involved in public policy work in South Asia with our local partner in the region, CorstonSmith Asset Management. South Asia has become an important focus for institutional investors not only for emerging investment opportunities, but also because of the opportunities and prospects for improvements in corporate governance among companies. Whilst we note that there is yet room for improvement in regulation to bring it further in line with best practice, we have welcomed efforts by local regulators and initiatives to improve corporate governance standards in South Asia. We have worked hard to develop our relationships with policymakers in the region and have shared our views that shareholders are willing to offer more support and investment in companies with accountable boards, which should lead to a greater long-term value creation. We continue to work with local regulators to advance minority shareholder protection and enhance the value of our clients holdings in the long-term. Issues and countries Malaysia During the first quarter of 2010, EOS responded to two consultation papers to the Securities Commissions Malaysia and Bursa Malaysia (the Malaysian Stock Exchange). We broadly agreed with proposed amendments to improve investor protection in the event of takeovers and asset disposals. We have strongly encouraged regulators to strengthen the measures to protect minority shareholders interests. In the first consultation paper on the Malaysian code on takeovers, we particularly welcomed the proposal 10 EOS Public Engagement Report Q1 2010

13 to strengthen disclosure requirements for independent advisors. The proposals would help offeree shareholders to make more sound and informed decisions by better understanding the transaction terms. Furthermore, we stressed the importance of interpretation and usage of such standards in a consistent manner in the market to balance the interests of all parties in takeovers. We also responded to the second consultation paper on the listing requirements on privatisation of listed companies via asset disposal. We communicated our views on the approval thresholds for the asset disposal, to ensure that the thresholds are sufficient to provide minority shareholders protection in the light of general practices in other markets. We continue to push regulators to plug the loophole in the law that could enable parties to effectively take over listed companies with the support of a simple majority of shareholders. Singapore We participated in the consultation by the Singapore Stock Exchange on proposed amendments to the listing rules to strengthen corporate governance policies. One of the main proposals in the consultation was to strengthen the framework of effective controls in cases such as assignment of the management and reviewing the management s performance for companies under special circumstances or based abroad. The consultation intended to enhance roles by independent directors and independent audit firms such as ensuring that the management s performance and companies financial statements are appropriately checked by them. In order to ensure the oversight functions in the process, we believe that the proposed measures help those boards develop more transparent and better decision making, which should lead to greater value creation. We also welcomed a move to improve internal controls. In particular, we strongly endorsed measures relating to the improvement of transparency and accountability in internal controls, such as the proposal to require disclosure of the amount of audit fees and non-audit fees respectively. Other proposals included assignment of a governance advisors for two years post listing, disclosure of the audit committee s opinion on the annual report regarding the adequacy of internal controls and risk management systems. We believe that a more robust and effective system of internal controls would help the companies increase transparency and accountability to shareholders. Where there is a great extent of trust on companies by shareholders, we believe that shareholders are willing to offer more support and investment. Therefore, we believe companies with concerned and involved shareholders are more likely to achieve superior long-term returns than those without. We thus supported the proposals, as we were reassured that the proposed changes would enhance oversight of the board and improve corporate governance standards. We will carry out followup discussions with the regulator on related issues. Philippines We have actively discussed the Exchange s proposal for a so-called Maharlika board, a market with higher corporate governance standards. After discussing the proposal at length with the regulator, we were able to largely extend our support for this plan and encouraged the regulator to pursue this innovation. At the same time, we have drawn the regulator s attention to the issue of implementation, as we believe that correct implementation is vital for the Maharlika initiative to succeed. We raised examples of the failure of initiatives in other emerging markets due to a failure to positively enforce new rules. We thus strongly encouraged the regulator to introduce appropriate measures to implement and enforce the Maharlika board standards. We believe that the Maharlika board may further improve market integrity in the Philippines, which should encourage investors to support and invest in Maharlika companies. Lastly, we noted a handful of detailed concerns regarding the proposed standards for the market, these included rules relating to disclosure of related party transactions, shareholder meeting arrangements and anti-takeover mechanisms. The Exchange welcomed our support and input, and agreed to consider our detailed recommendations. Indonesia We wrote to the Indonesian Stock Exchange on the role of corporate governance committees and enforcement among listed companies. Whilst such committees are recommended by the local governance code, we noted that there are very few listed companies that have one. We also noted some cases in which a committee was established to perform an operational function of compliance and internal control, reporting to the executive board of directors instead of the board of commissioners. We encouraged the regulator to consider further steps to urge more companies to establish a governance committee and place it under the purview of the board of commissioners in order to improve board oversight. EOS Public Engagement Report Q

14 Social and ethical: Supply chain child labour Promoting best practice in the cocoa industry The cocoa industry faces direct commercial risks around child labour issues linked to its sourcing of raw material products from the Côte d Ivoire and Ghana. Though the industry committed to tackling the issue a decade ago, reports about the widespread use of child labour on West African cocoa farms have regularly surfaced over the last few years. This issue has re-emerged in combination with a decline in the quality and quantity of cocoa production in these countries, raising the stakes and necessity for the industry to act. Statistics Overview Number of companies engaged with: 4 Reassurance gained: 1 Number of companies where substantive change sought: 3 Number of these showing progress so far: 2 Whilst child labour is generally perceived negatively due to the fact that children employed full-time in manual labour are prevented from attending school, denying them the education that may be a route out of poverty, in reality the issue is less clear cut. The contribution that children s income can make to the household finances may determine whether the family is able to afford food or not. The term child labour often calls to mind sweatshops and dangerous factories but in reality, children more often work either in a domestic setting or as part of a family effort. In our engagements, we therefore seek to distinguish between children employed in dangerous or abusive conditions and seasonal work alongside family members. In the cocoa industry, plantations tend to be small and at harvest time children help their parents during times when they are not at school. However, reports show that some children working on these farms, some of whom have been trafficked, work in conditions defined as the worst kind of child labour by the ILO (the International Labour Organisation). Principle 5 of the Global Compact commits signatory companies to taking effective action to end child labour. In 2001, the Harkin-Engel Protocol was implemented in an attempt to eliminate the worst forms of child labour in West African cocoa farms. As a result, the industry joined forces through the International Cocoa Initiative (ICI). The foundation aims to establish a public certification system. This is effectively a programme for collecting data to assess the extent of the issue and working with communities in order to remediate the problem. However, progress in the field is slow and lack of effective monitoring of the supply chain still creates a significant reputational risk for companies in this industry. 12 EOS Public Engagement Report Q1 2010

15 Companies and Issues EOS has been intensively engaging with the major chocolate companies for several years. Our approach is to talk to companies about labour standards as a whole rather than solely about child labour issues. This is because asking companies to eliminate child labour in isolation can create knock-on problems elsewhere in affected communities. The complexity of the supply chain calls for a global approach as the industry buys cocoa mostly on open markets and companies therefore have limited direct control over dispersed small producers. We encourage companies to promote meaningful change in local practices and support NGOs and local initiatives. However, stakeholders acknowledge that the effectiveness of the ICI programmes is difficult to assess. We believe that better coordination is needed on an industry-wide level and we have also pressed companies to implement additional sustainability and remediation schemes. Whilst the vast majority of companies have significantly improved their process and policies, in our engagement we have encouraged companies to go further than ethical and educational remediation schemes and to consider the strategic mapping of a more controlled supply chain. Over the course of our engagements we have been pleased to see major players in the industry moving towards fair trade sourcing and setting up best practice that could lead to extended monitored, if not fair trade, sourcing. Encouraging producers to organise themselves in co-operatives enables a more focused and efficient combination of providing education to farmers on how to reduce costs, improving productivity and at the same time addressing human rights issues, including the worst forms of child labour. Overall, the industry has put in place a series of positive measures to tackle the issue. In our dialogue with companies, we have raised our concerns at board level and have sought to gain reassurance on the board s accountability and oversight of this issue. We believe that we have achieved some success in encouraging better communication with stakeholders and financial commitments to putting in place better systems for monitoring supply chains. We are now pressing the industry to provide investors with more transparent disclosure detailing their sustainability and risk management structures, as well as a regular assessment of the impact of the programmes in place. The industry needs to establish a stronger monitoring system of the supply chain by setting up a concrete set of indicators to monitor progress made against targets. One key item of information should be the percentage of production sourced from co-operatives audited for ethical standards. The industry acknowledges that there is a pressing need to improve reporting in this area. We are currently focussing our engagements on the creation of a meaningful reporting standard. Companies identified by NGOs as having issues in this area include Hershey (US), Archer Daniels Midland (US), Kraft (US) and Nestlé (Switzerland). EOS Public Engagement Report Q

16 Public policy and best practice Protecting and enhancing value by promoting better regulation EOS contributes to the development of policy and best practice on corporate governance, corporate responsibility and shareholder rights to protect and enhance the value of its clients shareholdings over the longer term. Investment institutions are typically absent from public policy debates even though they can have profound impact on shareholder value. Overview EOS actively participates in debates on public policy matters to protect and enhance value for clients by increasing shareholder rights and boosting protection for minority shareholders. This work extends across: company law, which in many markets sets a basic foundation for shareholder rights; securities laws, which frame the operation of the markets and ensure that value creation is reflected in value for shareholders; and in developing codes of best practice for governance, management of key risks and disclosure. In addition to this work on a country-specific basis, we address regulations with a global remit, which are currently in the areas of accounting and auditing standards. Investment institutions are typically absent from public policy debates even though they can have profound impact on shareholder value. EOS seeks to fill this gap. By playing a full role in shaping these standards we can ensure that they work in the interests of shareholders rather than being moulded to the narrow interests of other market participants (particularly companies, lawyers and accounting firms, which tend to be more active than investors in these debates) whose interests may be markedly different. 14 EOS Public Engagement Report Q1 2010

17 Highlighted sample activities Bank regulation, remuneration and risk management We continued to push for appropriate regulatory reforms in banking and financial services. Alongside our engagements with individual institutions, we developed a paper highlighting our outline roadmap for the banking sector and a set of guidance which reflects our views on pay in the financial industry. Both call for significant reforms. We are sharing these documents with regulators in the leading markets as well as individual companies, but most importantly we are seeking to promote them on the international stage, in particular through the G20 and the Financial Stability Board. Most specifically with the FSB, we took the opportunity of a peer review of the implementation of its Principles for Sound Compensation Practices the de facto global standard for the industry following the G20 s endorsement to press for further steps. While we support the overall shape of the standards we are concerned about the patchy application of them internationally, both across countries and at the individual company level. CDP Water Disclosure We are providing active input to a new project from the Carbon Disclosure Project team, which is seeking greater company disclosure on the topic of water risk. Not least as the climate changes, water intensive businesses are facing increasing local problems with regards to water scarcity, and we share the CDP team s desire to see these risks considered more appropriately in company reporting. This broad-based approach will fit well alongside our ongoing engagements on the particular water-related risks faced by individual companies. Japanese shareholder rights reforms We continue to pursue our efforts to encourage further shareholder protections in Japan, and we welcomed the announcement from the Tokyo Stock Exchange of more protection for existing shareholders by the introduction for the first time of the concept of pre-emption to the Japanese market, something we have long been seeking. This new approach will limit the risk of dilution of existing shareholders and the danger that their company will be changed markedly in a way beyond their control. As well as the TSE, we have continued to engage with other officials, including METI and the FSA, to promote further reform. Korean pre-emption rights We have also seen success in our work on pre-emption rights in the Korean market. Regulatory reform which we promoted has opened the door to leading companies reducing the scope for non-pre-emptive issues from the typical 50% to a maximum of 20%. We continue to push for others to follow this best practice. Access to Medicines We continued our dialogue with those developing the new Access to Medicines index. They are now preparing to publish this index, which provides an overview of the involvement of major global pharmaceutical companies in making their products and expertise available at appropriate prices to the world s poorest people and nations and so highlights leaders and laggards on an issue which is central to their licence to operate. As well as our work to encourage the index to draw more positive distinctions between different companies, we discussed how the process can be made more robust and sustainable over time. Brazilian disclosure reforms We welcome moves by the Brazilian authorities to change the standards around corporate disclosure and communication with shareholders. The reforms closely mirror calls we made in 2008 in conjunction with local pension fund PREVI, and we look forward to them opening the door to much improved dialogue between local companies and their investors. Forest Footprint Disclosure Project We took part in the launch of the inaugural report from the FFD Project, which is attempting to raise greater corporate consciousness of the forestry impacts of corporate supply chains. This is a Project that we have taken an active role in, not least because deforestation is a crucial issue for climate change, with realistic estimates that it is responsible for perhaps as much as 20% of all greenhouse gas emissions and the drivers for deforestation often being embedded in the supply chains of public companies. The FFD Project seeks disclosure from companies as to their indirect impacts on forestry, and we were therefore pleased to see the level of involvement by corporates at the launch. We will take forward the work of the project through a position on its steering committee, and also in individual engagements with companies. EOS Public Engagement Report Q

18 Public policy and best practice continued UN PRI on bribery and corruption The UN PRI clearinghouse engagement on bribery and corruption which we are to co-lead is now ready for launch. We have worked with Transparency International, the leading NGO in the area, to identify companies with risk exposures to this issue but whose disclosures on how they manage them are unsatisfactory. We are writing to these companies and following up with direct engagement. Other public policy work this quarter included: Companies Acts and equivalents Canadian companies act formal response requesting incorporation of 11 key shareholder democracy provisions (e.g. majority voting, independent chair) German regulation dialogue with politicians and chancellor s advisors Japanese METI survey response to highlight ways in which regime can be made more shareholder-friendly UK companies act dialogue with Department of Business on streamlining regulation Securities Laws and Regulations Canadian shareholder rights lobbying Toronto Stock Exchange to instil basic shareholder democracy provisions in listing rules Indonesian standards dialogue with Indonesia Stock Exchange to improve regime on governance and enforcement Japanese disclosure and governance response to FSA proposals for enhancing standards Korean shareholder accountability dialogue with FSS on ways to enhance regulatory regime Philippines listing standards response to consultation on new board with higher standards Singapore listing rules response to consultation Taiwan disclosure regime dialogue with FSC ICGN corporate risk oversight principles response to consultation IIGCC carbon disclosure frameworks continuing efforts to encourage companies in relevant sectors to adhere, developing other sectors Italian loyalty dividends response to survey UK combined code review response to consultation Global standards IAASB on auditability and reporting meeting with chair to discuss the need for cooperation between standard setters, better auditor reports, and clear independence for the IAASB itself IAASB on financial instruments response to consultation to encourage adoption of auditing approach we helped to draft IAASB on greenhouse gas emissions assurance response to consultation to discourage a standard which appears to protect the profession rather than encourage best practice IASB on consolidations input to the IASB/FASB project on consolidations IASB on management commentary response to consultation to encourage approach flexible enough to meet national legal requirements IOSCO on auditor reports response to consultation to encourage more useful global standards Codes of best practice ACGA white paper on Taiwanese governance work to develop new paper encouraging reform Danish governance code response to consultation EU engagement code participation in informal hearing on possible EU adoption of a code 16 EOS Public Engagement Report Q1 2010

19 Hermes votes at general meetings wherever practicable. We take a graduated approach and base our decisions on annual report disclosures, discussions with the company and independent analysis. We inform companies before we vote against or abstain on any resolution, usually following up such votes with a letter. We maintain a database of voting and contact with companies and if we believe further intervention is merited, we include the company in our main engagement programme. Hermes votes at company meetings all over the world, wherever its clients own shares. EOS Public Engagement Report Q

20 Voting overview How we voted Over the last quarter PNO Media voted at 126 meetings (1,081 resolutions). At 39 of those meetings we opposed one or more resolutions. We voted with management by exception at three meetings and we did not abstain at any meetings. We supported management on all resolutions at the remaining 84 meetings.. Africa and Middle East We voted at four meetings (17 resolutions) over the quarter. North America We voted at 54 meetings (435 resolutions) over the quarter. South America We voted at five meetings (29 resolutions) over the quarter. Asia (except Japan) We voted at 20 meetings (116 resolutions) over the quarter. Japan We voted at five meetings (33 resolutions) over the quarter. Australia and New Zealand We voted at one meeting (four resolutions) over the quarter. Europe We voted at 24 meetings (292 resolutions) over the quarter. UK We voted at 13 meetings (155 resolutions) over the quarter. Global We voted at 126 meetings (1,081 resolutions) over the quarter. Total meetings voted in favour Meetings where voted against (or voted against AND abstained) Meetings where abstained Meetings where voted with management by exception 18 EOS Public Engagement Report Q1 2010

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