Pensioenfonds PNO Media Engagement report

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1 Pensioenfonds PNO Media Engagement report 2 009

2 w ww.hermes.co.uk 2

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: Board independence Representation for minority shareholders 08 Governance: Pre-emption rights Safeguards for shareholders 10 Social and ethical: Supply chain Clothing retail supply chain 12 Environmental: Deforestation Forestry engagement programme 14 Public policy and best practice Protecting and enhancing value by promoting better regulation 17 Voting overview How we voted 19 About EOS EOS Public Engagement Report Q

4 Engagement by region Over the last quarter we engaged with 64 companies held in PNO Media s portfolios on a range of 158 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. Americas We engaged with nine companies over the last quarter. 13% 5% 24% 10% 24% 24% Asia We engaged with 16 companies over the last quarter. 18% 8% 51% 13% Europe We engaged with 25 companies over the last quarter. 2% 5% 17% 17% 5% 31% 8% 13% 12% UK We engaged with 11 companies over the last quarter. 3% 3% 32% Africa/Middle East We engaged with three companies over the last quarter. 12% 33% 37% 25% Global We engaged with 64 companies over the last quarter. 1% 26% 13% 21% 12% 10% 6% 13% 13% 13% 18% 9% Shareholder communications Social and ethical Environmental Risk management Business strategy Governance Remuneration 02 EOS Public Engagement Report Q2 2009

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 21% of our engagement over the last quarter. 6% 6% 15% 9% 12% 18% Environmental Environmental issues featured in 12% of our engagement over the last quarter. 36% 37% 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. 12% 22% 16% 11% Employee relations Community relations Health and safety Supply chain Operations in troubled regions Corporate culture Licence to operate Other Climate change/carbon intensity Water stress Oil sands Other Risk management featured in 9% 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. 2% 5% 2% 2% 5% 7% 10% 67% Accounting or auditing issues Board structure Committee structure Related party transactions Succession planning Poison pill Voting rights Separation of Chair/CEO 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. Engagement statistics Number of companies engaged with on strategic matters this quarter: 76 Africa/Middle East 5 Americas 6 Asia 33 Europe 22 UK 10 Number of significant steps forward in strategic/governance engagements this quarter: 12 Africa/Middle East 1 Americas 2 Asia 3 Europe 4 UK 2 Includes only companies which in this quarter have made substantive strategic or major governance changes. Overview EOS s 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 Q2 2009

7 Highlighted sample engagements In the Africa/Middle East region, we met with the senior independent director of a company to discuss succession planning for the chair. We talked through the strategic and operational challenges at the company and the key qualities which were needed in the next chair successfully to take the business forwards. We were able to test the board s oversight of key operational risks in the business. We were invited to have further discussions on succession, including providing the nominations committee with specific names of potential candidates. In the Americas, we pushed for an acceleration of strategic change at a company with which we have been engaging for some time. Since the start of our engagement, the company has announced its intention to sell an underperforming business which lacks scale, but progress on this divestment has been slow; we pressed to understand why and what process the board is going through to gain full value for this business. We also argued for further strategic change at the company, which even when this sale does occur will remain a conglomerate. Having seen a recent change of CEO, we continued to argue for further board change to ensure that the appropriate skills are in place. Over recent times, we have been pressing a company in Asia to develop a clearer strategy with transparent milestones. In particular we have argued that it should cease its apparently value-destroying approach of taking minority investments in companies in overseas markets which operate in businesses away from its own core. We were therefore pleased to see change this quarter with a realignment of the company s strategic approach, moving away from holding associates and towards full ownership of its key holding in a company in its same core business. The level of transparency on the strategy and on performance milestones is also moving in a highly positive direction. We welcomed significant steps forward at a company in Europe with which we have been engaging. As we have been arguing for some time, the company has now withdrawn from its sprawling geographic expansion plans so that it is now refocused on its core markets where it has a much more defensible market position, and barriers to entry enabling it to generate better returns. We also believe that we are being listened to in respect of the concerns we have been raising with regards to governance, and in particular the combination of the roles of chair and CEO. While this may not change in itself at least the company appears to be moving towards appointing a lead independent director to act as a balance in the boardroom. In the UK we met with the CEO of a company which we have been calling on to move towards more normal governance and ownership structures. In the context of tension around the ownership structure, we were able to gain some undertakings that this is an issue with which the board will now seek to engage actively. In addition, we were assured that succession planning will be put in place for the CEO s own position, given that his role is a short-term one to cover the current economic downturn. We also tested the company s strategic positioning in an increasingly competitive market and encouraged the CEO to accelerate moves to shift its market position to take advantage of emerging long-term trends. EOS Public Engagement Report Q

8 Governance: Board independence Representation for minority shareholders EOS engages with companies around the world with regard to the composition of their boards. EOS s unique resource which includes nationals from all major financial markets has facilitated the development of a countryspecific approach to questions of board composition. Statistics Number of companies engaged: 84 Reassurance gained 15 Number of companies where substantive change sought 69 Number of these showing progress so far 20 Having a significant element of independent directors on the board is an important part of an effective corporate governance structure which enhances accountability to all shareholders. Overview Companies need to be guided by boards comprised of members with an appropriate and diverse range of competencies, knowledge and experience to enable them effectively to carry out their duties and responsibilities. These include selecting, guiding, monitoring and challenging management and thus require an ability to step back and act objectively and independently. As well as a balanced composition, boards should ensure that a significant number of members are able to exercise independent judgement. In certain markets, the law, listing rules or corporate governance codes set out specific requirements with regard to the number of independent members on the board. However, in many other developed and emerging markets there are no clear rules or the guidance for companies, including the definition of independence, is vague. EOS generally favours a comply or explain, rather than a rule-based approach to board composition. This approach requires some market specific and generally accepted corporate governance guidance on independence and crucially institutional investors who engage with companies. In markets where the ownership of companies is more concentrated and conflicts between controlling and outside shareholders may arise, it is particularly important that boards include a significant number of independent members. These members play a crucial role where there are real or perceived conflicts of interests between controlling and minority shareholders, and as such add or protect the value of the company as a whole for all of its stakeholders. The most appropriate and effective board composition may be contingent on a number of factors that differ not only between markets and sectors but may also change during the company s lifecycle. Before engaging with a company on board composition, EOS conducts an in-depth analysis of its specific circumstances. This pragmatic and tailored approach has contributed significantly to EOS s successes in engaging with companies on board composition and encouraging greater independent representation for minority shareholders. 06 EOS Public Engagement Report Q2 2009

9 Issues and companies Having a significant element of independent directors on the board is an important part of an effective corporate governance structure which enhances accountability to all shareholders. It is therefore vital for investors who hold minority stakes in companies to protect their interests by ensuring that boards contain adequate independent representation. EOS has developed a market and company specific approach to evaluating company boards. Where necessary, EOS works with other institutional investors to further its engagements. EOS engaged intensively on this issue with a Scandinavian company where the controlling shareholder sought to push through a number of related party-transactions. As the representative of minority shareholders, EOS had concerns over the strategic rationale and financial terms of the proposed transactions. However, due to the major shareholders controlling stake in the company, the chances of reversing these transactions were low. Engagement thus focused on ensuring a thorough review and oversight of similar future transactions by strengthening the independent representation on the board and encouraged the nomination of additional directors with relevant industry experience. This engagement resulted in the nomination committee's recommendation to put forward two independent candidates for election at the EGM. In addition, one of the existing directors related to the major shareholder stepped down. EOS was delighted that its views had been taken into account in spite of the significant influence of the controlling shareholder and it supported the election of the candidates at the EGM. EOS also engaged with the board of a major German electronics company with a history of poor strategic and high-level personnel decisions that impacted on severely on shareholder value and performance over a number of years. The board was dominated by the chair and lacked true independent representation. Over a period of years there were a number of questionable top management appointments and widely reported departures and delays to vital strategic decisions; however, the chair failed to acknowledge the need for board evaluation and refreshment. Sending a strong message to the chair and the board that changes were required, EOS presented a shareholder proposal at the company s AGM asking other shareholders to vote against the discharge of the chair, thus expressing their lack of confidence. At the AGM, EOS s proposal was supported by 49.9% of the shareholders, the lowest support ever for the discharge of the chair of a large listed Germany company. EOS continued to press the board for change. Three months after the AGM, it was announced that the chair would step down and the company gave reassurance that the board will be strengthened through the inclusion of additional independent directors at the next AGM. A large European conglomerate suffered a compliance crisis and was underperforming peers due in part to an extremely complex and overly diversified portfolio of businesses and an inefficient management and oversight structure. Analysis showed that the existing board lacked a strong independent element and international representation. EOS engaged intensively with the company, including the chair, during the critical nomination period to outline important characteristics for proposed nominees. The nominees proposed at the following year s AGM had suitable competencies, knowledge and experience and, importantly, a significant number were independent of the company, top management and other board members. Within the framework of a comprehensive engagement with a major European bank, EOS was recently successful in strengthening the independent element of its board and introducing extensive expertise in risk management. EOS garnered support from other investors for two nominees that could bring independence and risk management expertise to the board. Under a special legal mechanism, together with other investors, EOS succeeded in submitting the candidates on a minority slate for election to the board at the AGM and was delighted when these two candidates were elected to the board. At EOS s suggestion, one of the new directors with specific expertise in risk modelling and emerging markets country risks was appointed to the audit & risk committee. Companies which have, or had, issues in this area include: Aker Solutions (Norway), Siemens (Germany), Electric Power Development (Japan), Infineon (Germany), Japan Tobacco (Japan), UBS (Switzerland), UniCredit (Italy), Colt (UK), Hyundai Motor (South Korea), IntesaSanpaolo (Italy), Dimension Data (UK/South Africa), Yamaha (Japan). EOS Public Engagement Report Q

10 Governance: Pre-emption rights Safeguards for shareholders The issuance of new shares without pre-emption rights is a key concern for minority shareowners, particularly in Asian markets. EOS s intensive engagement on shareholder rights combines ongoing discussions with companies and local regulators. Statistics Number of companies engaged: 71 Reassurance gained 20 Number of companies where substantive change sought 51 Number of these showing progress so far 13 In Hong Kong and Singapore it is common practice for companies to request shareholders to vote for a general mandate to issue new shares without preemptive rights each year at their AGMs. Overview From time to time companies may seek permission from shareholders to issue additional new shares. Whilst flexibility is required to accommodate the individual circumstances of different companies, the issuance of new shares without pre-emption rights is a key concern for minority shareowners. The influence of major shareholders over the board and management, particularly in Asian markets, creates the potential for new issuances without pre-emptive rights to excessively dilute the holdings of existing shareholders. This concern is particularly prevalent in Asia. In Hong Kong and Singapore it is common practice for companies to request shareholders to vote for a general mandate to issue new shares without pre-emptive rights each year at their AGMs. This typically allows companies to issue up to 20% of the share capital up to a possible level of 20% discount to the benchmarked price at the time of issuance. In South Korea during the 2009 voting season a significant number of companies proposed amendments to their articles to provide for new equity to be issued without pre-emption rights up to 50% of existing share capital. Whilst these proposals comply with local regulation and are often put to shareholders without a specific intention to exercise the mandate, they do not offer adequate protection for minority holders and, if exercised, may have a highly dilutive impact. As the representative of long-term investors, EOS strongly supports the principle of pre-emption as a safeguard which protects existing shareholders against the risk of their interests being diluted by the introduction of other investors and finance. Whilst rights issues can offer an important, efficient and fair way for companies to raise further equity, existing shareholders knowledge of the company may make them best placed to provide finance at a lower cost if the proposition from the company is justified. Where pre-emption rights are adequately protected, investors will derive confidence that their interest in the company will not be diluted and so will be more willing to invest, lowering the cost of capital. 08 EOS Public Engagement Report Q2 2009

11 Highlighted sample engagements EOS s intensive engagement on shareholder rights combines both discussions with companies and local regulators, particularly in those markets where shareholders do not generally enjoy the same protection of pre-emption rights as under the generally accepted standard of best practice in the UK. In Hong Kong EOS has engaged with over 90 companies to encourage them to voluntarily reduce requested levels of new issuances without attached pre-emption rights. EOS strongly urged those companies which may need to raise capital quickly to provide shareholders with sufficient explanation for these requests in advance. As a result, at their AGMs, 12 of these companies lowered their request for approval of the general mandate to issue new shares to levels of either 10% or 5%. At one Hong Kong-listed company making progress towards achieving best practice, EOS met a number of times with senior management. The company sought shareholder approval at its AGM for a proposed merger and EOS used its discussions with management to secure protection for minority shareholders in the event of related-party transactions, emphasising the importance of a high-level of accountability and pre-emption rights. EOS has also held a dialogue with 19 other companies, gaining certainty through these discussions that the boards will review pre-emption rights over the next 12 months to the 2010 AGM season. In South Korea, EOS engaged with 31 companies on proposed amendments to their articles. Most provided records of historical financing activities as assurance that they will not use the general mandate contrary to minority shareholders interests. The majority of companies EOS spoke with undertook to deliver its concerns to the board. EOS has supported its work with individual companies by actively participating in public policy debates on this issue across Asia. In addition to consulting with the Hong Kong Stock Exchange in 2008 on proposed amendments to its listing rules, EOS has engaged with the Hong Kong Securities and Futures Commission, the Financial Supervisory Services and the Ministry of Finance & Economy in South Korea and the Bursa Malaysia to press for greater shareholder protection. At the Bursa Malaysia EOS expressed strong opposition to a proposed regulatory increase to the general mandate for new share issuances without pre-emption rights. Following this intervention, the Malaysian regulators opted to maintain the current maximum level of 10% of the issued capital for new share issuance without pre-emption rights. In Japan where pre-emption rights are less common, EOS met the president of Tokyo Stock Exchange for further discussions on this issue. A number of large capital increases through private placements raised concerns over the possibility of illegitimate uses to prevent potential takeover bids, as well as substantial dilutions to existing shareholders. Following these discussions, the TSE announced new measures to enhance shareholder protection particularly in the event of financing activities through private placements, including restrictions on dilutive impact and advanced requirements for timely disclosure and improved accountability. Whilst this issue is less prominent in global markets outside Asia, EOS has been successful in raising awareness and promoting best practice in Europe, notably in Germany and France where the level of authorisations for capital increases without pre-emptive rights has lowered significantly. In the UK EOS has actively highlighted the importance of the principle of pre-emption to institutional investors and has engaged intensively with one of the major banks on its proposed financing without pre-emption rights. Among those companies which have faced issues relating to pre-emptive rights are: Hutchison Telecommunication (Hong Kong), Yue Yuen Industrial (Hong Kong), Hong Kong and China Gas (Hong Kong), C C Land Holdings (Hong Kong), Sino-Ocean Land (Hong Kong), Hutchison Whampoa (Hong Kong), First Pacific (Hong Kong), Xinao Gas Holdings (Hong Kong), Great Eagle Holdings (Hong Kong), CNOOC (Hong Kong), China Resources Enterprises (Hong Kong), China Resources Power Holdings (Hong Kong), China Mengniu Dairy (Hong Kong), Kangwon Land (South Korea), NHN Corporation (South Korea), Kumho Tire (South Korea), UBS (Switzerland), and Rio Tinto (Australia/UK). EOS Public Engagement Report Q

12 Social and ethical: Supply chain Clothing retail supply chain EOS engages with retailers across the world to ensure effective management of supply chain related risks and to encourage companies to exploit opportunities to both protect and enhance shareholder value. Statistics Number of companies engaged with 31* Reassurance gained 19 Number of companies where substantive change sought 12 Number of these showing progress so far 7 *In addition, we have addressed this issue in engagement with companies in all high-risk sectors to ensure systematic preventative procedures are in place. EOS has held many in-depth discussions with companies regarding the audit process for existing suppliers and new factories, weighing the benefits of unannounced spot checks on the audit process. Overview Many companies have codes of conduct in place which outline their practices for working with key stakeholders, including ethical standards stating what they require from suppliers in relation to workers rights and conditions, and health and safety. Yet allegations of poor practices in this area continue to surface, including the use of vulnerable groups such as children in the supply chain. It seems evident that if companies are looking to mitigate and manage the risks within their supply chain, reliance on auditing procedures alone is not sufficient. Instead for companies to effectively implement an ethical strategy and address some of the underlying problems that give rise to poor labour practices, it is essential to have buy-in from across the company and an engaged approach with suppliers. Companies in the retail sector will typically have processes for auditing their supplier s factories either through internal or third party audit teams. Companies which move beyond compliance driven activity to ensure that supply chain management actively takes into account issues that arise and seek appropriate remedial action will be better placed to tackle the challenges in this area. Sub-contracting is an issue which exposes companies to issues such as underage labour. EOS therefore looks for companies to take a responsible approach in mapping their supply chains and engaging with factories to actively map when and how far along the chain the producers have been sub-contracting, as well as protecting other vulnerable groups such as migrants and home-workers to ensure wages are paid down the different tiers. There is significant evidence to indicate that if a company s design and manufacturing process is not effectively managed it can adversely impact on suppliers labour standards for example, by resulting in excessive overtime and sub-contracting, which arises as a result of suppliers inability to meet tight deadlines. With global pricing pressures leading to the risk of suppliers cutting corners on their labour standards, it is important that companies adopt a sustained business focus on this issue. 10 EOS Public Engagement Report Q2 2009

13 Issues and companies In its company engagements, EOS continually emphasises the importance of having a responsible and transparent sourcing strategy in place with operational principles encouraging the adoption of better purchasing practices such as stronger communication between buying teams, suppliers and in house or external auditors. For a number of years EOS has engaged with retailers on their consideration of the key risks in their supply chain. Engagements have involved meetings with board members and CSR specialists, site visits to supplier factories in both China and India and dialogue with relevant organisations and other shareholders. Over time, a growing culture on the high street and demand for cheaper, disposable fashion has evolved alongside a deteriorating macro economic environment. In response, EOS has paid close attention to ensuring that companies financial constraints do not negatively impact or compromise labour standards in the supply chain. EOS has engaged with companies to ensure that sustainability programmes are robust to deal with the challenges in this area as well as being implemented throughout the organisation and embedded into the company s strategy. EOS encourages boards to take ownership of the key risks at a senior level. A small number of companies engaged with have further to go before they can be considered as having an effective supply chain process in place; in these instances EOS has escalated its concerns to audit committees to create awareness of the risks and reputational damage that may be caused by an ineffective response to this issue. This high-level oversight is critical to ensuring that the companies take greater ownership of the problems and drive improvements rather than being reactive and abandoning suppliers that fail, which can itself have negative impact on communities. In addition to holding company engagement dialogues with senior management, EOS invests time visiting supplier factories in China and India to further test companies commitment to their stated codes of conduct. Site visits are undertaken by EOS s engagement specialists with knowledge of local business culture and relevant language skills. Having spoken with factory owners and employees EOS has an appreciation of the day-to-day challenges faced by suppliers and companies and has seen at first hand how working conditions can be compromised by unrealistic deadlines, with workers forced to work excessive hours to complete orders on time. EOS promotes the benefits of developing an ethical awareness and relationship with suppliers that takes account of the challenges presented by short production time scales and how this can compromise labour standards. Unrealistic production and short lead times and irregular demand for large quantities can put extreme pressure on suppliers and EOS therefore encourages companies to manage the clothing design process more effectively. EOS has held many in-depth discussions with companies regarding the audit process for existing suppliers and new factories, weighing the benefits of unannounced spot checks on the audit process. It has also tested the benefits of using in-house as well as external auditors for their specific business model, challenging the perception of conflicts of interest and oversight of external auditors. EOS has shared the insights gained during its supplier factory visits in Asia with other institutional investors, discussing key risks including child labour, home working, and the relationship between buying teams and suppliers to promote best practice. EOS continues to engage with companies and to build on long-standing relationships with companies who face growing pressures in their supply chain ensuring that there is a systematic approach across the business. Further, EOS does not neglect those companies who have demonstrated a commitment to being accountable on this issue and lends its support to the ongoing monitoring process. Companies which may face risks in this area include: Yue Yuen (HK), Associated British Foods (UK), Adidas (DE), Belle (HK), Next (UK), Sports Direct (UK), BasicNet (IT), Puma (DE), Tesco (UK), Asics (JP), Debenhams (UK), Gap (US), WalMart (US), Marks and Spencer (UK), Laura Ashley (UK). EOS Public Engagement Report Q

14 Environmental: Deforestation Forestry engagement programme Deforestation is one of the major drivers of climate change. EOS s engagement aims to address companies whose supply chains are responsible for deforestation and identify both their impact on the environment and the risks they face through these operations. Statistics Number of companies engaged with: 7 Reassurance gained 3 Number of companies where substantive change sought 4 Number of these showing progress so far 1 Companies face particular risk from deforestation through their supply chains and need to plan for the impact of new regulation. Overview Deforestation is a major driver of carbon emissions impacting on a global scale on climate change and on a more localised level on ecosystems and biodiversity. Understanding of the effects of deforestation continues to increase, backed by truly stunning figures: some 20% of the world s greenhouse gas emissions are caused by deforestation more than twice that from global transport releasing around seven billion tonnes of CO2 into the atmosphere each year. Forests are able to absorb around 4.5 billion tonnes of CO2 each year, providing a huge ecosystem service to the global economy, valued between $45 and $80 billion per annum by the Intergovernmental Panel on Climate Change. Through forests ability to store carbon from the atmosphere, slowing deforestation is one of the cheapest and most effective methods of carbon sequestration. As well as having a positive effect on climate change, forests play a critical role in providing weather systems, food, energy and health security. Some 1.4 billion people directly rely on forests for their livelihoods. If the situation continues 13 million hectares, or an area the size of Greece, will continue to be cut down each year with the number likely to increase if we persist in measuring the benefits of cutting down trees without fully taking into account the services they provide whilst in the ground. Companies and consumers are becoming increasingly aware of the effects of deforestation, driven by media focus and NGO interest. Greenpeace has publicly targeted a large consumer products company over its sourcing of palm oil and is turning its attention to others whose supply chains include inputs sourced from South East Asian forests, as well as producing a report on the destruction of the Amazonian rainforests through cattle ranching. Media campaigns have highlighted companies involvement in deforestation, and the topic continues to gain press coverage as new research is released. This activity presents significant reputational risk to companies and can lead directly to a reduction in revenue streams. 12 EOS Public Engagement Report Q2 2009

15 Issues and companies EOS s engagement programme began with several companies in Europe and Asia, including large European paper producers, to identify industry best-practice and to gain an understanding the quality of the various certification providers and their processes and how they can translate into evidential results. EOS has discussed with companies how they manage their sourcing from smaller independent forest owners and ensure sustainability across the supply chain. Some companies were exposed by potential weaknesses in controls through sub-contractor violations of codes of felling practices which could jeopardise their certifications. EOS will continue to engage with these companies to ensure that such issues are being resolved. These discussions with companies identified a number of smaller individual initiatives, such as regeneration programmes, which companies are undertaking to maintain biodiversity and to minimise the direct environmental impacts of the paper mills. The general standard of sustainable forestry management in Europe is high and EOS will draw on its experiences with companies in this region to highlight good practice elsewhere. In Asia, EOS has engaged with companies to address sourcing from South-East Asian countries where illegal logging and unsustainable felling practices are common. Awareness of the issues among companies is encouraging, with a high-level of risk management and audit oversight throughout the supply chain. However there is room for improvement at certain companies through involvement in certification programmes and EOS continues to engage with those companies who have acted less progressively than their peers. EOS also addressed the risks with one company involved in a joint palm oil venture with an African partner. EOS advocated that the venture should be RSPO certified, particularly in light of the partner company s history of NGO and campaign group action and the ensuing reputational risks. EOS also identified additional room for improvement in reporting at some companies and pressed for further disclosure to allow shareholders better insight into the potential risks within their portfolios. EOS has taken a multi-faceted approach to its engagement programme owing to the potentially large number of companies at risk. This includes sponsoring The Forest Footprint Disclosure through the UN PRI to encourage companies to report on their forest footprint and understand how they can improve the sustainability of their supply chain where deforestation is present and manage the associated risks. The first report is expected in early 2010 from the 150 companies initially addressed. It is believed that many will simply not have considered the issue before and so significant interest and change in the mid-term is anticipated. Companies face particular risk from deforestation through their supply chains and need to plan for the impact of new regulation. The forthcoming Copenhagen negotiations in December are anticipated to include deforestation in the Clean Development Mechanism. The G20 agreed in April 2009 to act immediately on deforestation, and initiatives by individual countries, such as Brazil s target to reduce deforestation by 70% over the next 10 years, indicate a tighter regulatory landscape. This presents a direct risk to companies bottom-line earnings from increased costs and more stringent controls. The forestry engagement programme continues to expand in terms of both geography and industry sector to include pulp and paper producers, forestry management, food and beverages, cosmetics, fashion, and biofuels globally. EOS s direct engagement programmes; planned collaborative engagements through the PRI and involvement with the Forest Footprint Disclosure Project will enable EOS to strengthen its agenda on this pressing issue. Companies which may face issues in this area include: Norske Skog (NO), UPM (FL), Stora Enso (FL), SCA (SW), Nippon Paper (JP), Oji Paper (JP) and Olam (SG). 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 a profound impact on shareholder value. EOS seeks to fill this gap. 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 Q2 2009

17 Highlighted sample activities Major advances in US regulation Major US regulatory and governance reforms which we have been seeking for many years are now moving forwards. Among these significant changes was the Securities and Exchange Commission announcing the end of broker votes essentially ballot-stuffing in favour of management where the underlying shareowners have not voted for the election of directors. Furthermore, the 400 companies receiving TARP funds were required to put forward for shareholder approval advisory votes on pay, and we expect that such votes will be required of all US companies either next year or shortly thereafter. The SEC has also proposed new rules for proxy access, which will enable for the first time US investors to propose directors directly to the board without going to the expense and delay of a proxy contest (and without the disruption to relationships which such a contest implies). These are issues which have been on EOS s agenda for a number of years and which we have raised directly with key decision makers at the SEC and Congress at meetings this quarter. Among other issues that we discussed and strongly promoted in these discussions were: enhanced disclosure on remuneration and other issues, not least risk, by US companies; a reassessment of the process of quarterly reporting and guidance, which we see driving short-termist behaviour within companies and investors; and the issue of genuine majority voting for all US directors. We also welcome the SEC s decision to establish an investor advisory group which is likely to consider these and other issues; the advisory group includes EOS chair as a member. Regulatory responses to the crisis Having had significant input in various countries around the world into preparations for the G20 summit, we continued our efforts to influence international regulators in their responses to the financial crisis. In particular we pushed for close attention to the issue of regulatory arbitrage, which we believe will become a significant risk as the G20 and other markets heighten their regulatory oversight of local markets. There seems a real risk that financial activity may shift to markets where regulatory oversight is lower. In the short-term this may allow greater returns, but the additional significant risks are liable to undermine these returns over time as well as again undermining the security of the financial system overall. We highlighted to regulators putting the G20 declaration into effect ways in which this may be addressed. In addition, we also this quarter have directly called on the key competition authorities to remove the regulatory barriers which stand in the way of the financial services sector itself creating the best practice approach to remuneration which is needed. Repeatedly in our discussions with banks we have been told that they cannot develop a consistent industry approach with their peers for fear of breaching antitrust regulations; given the public interest in an effective approach to this issue we believe that these competition rules should be set aside in this respect. We also had input into the OECD s consultation on developments to its approach in response to the financial crisis, and the best ways for the European Commission to implement the De Larosiere proposals for the regulation of the EU s financial services industry. Forest Footprint Disclosure Project EOS participated in the launch of the FFDP, a new initiative seeking enhanced disclosure from companies whose supply chains use products arising from forests or formerly forested areas. Modelled on the Carbon Disclosure Project, the FFDP aims provide an insight into companies supply chains through a questionnaire. We believe that the project will be a useful tool to increase attention on deforestation issues across companies whose supply chains are implicated in damage to forested areas. Deforestation has a significant impact on climate change as well as having more localised impacts in terms of biodiversity and other environmental harm. We have had significant input into the questionnaire, both in terms of which companies it should be sent to and in the form and style of the questions that will be asked. A final draft is now being developed with a view to sending out the first round of questionnaires in July and collating results in January UN Global Compact and troubled regions We took part in a meeting of the UN Global Compact discussing issues around corporate involvement in conflict-affected countries. We talked through the risks EOS Public Engagement Report Q

18 Public policy and best practice continued to shareholder value from a failure effectively to manage the associated risks and were able to have dialogue with key individuals from various companies with relevant risk exposures. ICGN Principles revision An EOS team member is chairing the working group developing the new draft of the International Corporate Governance Network's main corporate governance principles. After a series of conference calls and discussions, the working group has finalised a draft set of principles which has now been shared with the ICGN members in an open consultation. Through our efforts, the new draft has significantly enhanced the quality of the discussion regarding the importance of corporate culture and the focus on appropriate skills and behaviours in the boardroom, as well as improving the discussion of shareholder rights and responsibilities. Seeking reform in Japan We also continued our efforts to enhance corporate governance in Japan, where a willingness to change seems to have been catalysed by the publication of the Asian Corporate Governance Association s white paper which we co-authored. We held a series of meetings with regulators, company representatives and other key decision-makers and believe we are receiving a positive hearing. Remuneration debate We continue to make progress in debates around the world on executive remuneration for example meeting with the South Korean regulatory authorities to discuss an appropriate response to pay in the financial sector. Most significantly in the quarter, our Australian joint venture Regnan has sparked a national debate and now government enquiry into pay in that country. Other public policy work this quarter included: Companies Acts and equivalents German governance law argued strongly that governance should remain a matter of best practice rather than this proposed legislation Indian companies act dialogue with key regulators to significantly enhance shareholder protection regime Japanese takeover rules continued dialogue to seek enhanced rules Securities Laws and Regulations Egyptian listing rules continuing work regarding disclosure of charitable donations Japanese pre-emption and disclosure rules ongoing discussions with regulators on enhanced protections Philippines pre-emption rights and disclosure discussions with stock exchange to seek enhanced protections Portuguese corporate governance dialogue with regulator to seek enhancements South Korean pre-emption rights dialogue with regulators to enhance regime Spanish related-party rules input to the regulator to seek enhanced regime UAE transparency rules seminar and discussions to encourage higher standards UK financial institutions regulation various inputs to Walker review process US employee free choice letter to leading companies to encourage readiness for legal changes Codes of best practice Canadian corporate governance consultation response on disclosure rules Indian governance working on ACGA governance white paper for India Japanese governance meetings with various regulators to encourage enhanced standards Nigerian corporate governance input to development of revised code South African corporate governance fulsome response to King III consultation Swedish corporate governance dialogue with committee chair to seek enhancements UK corporate governance input to review of the Combined Code Global standards Political influence on accounting standards-setting we sought to reduce the political pressures on the IASB to safeguard the body s focus on quality reporting for investors; we therefore pressed the EU and US to cut the political pressure and asked the IASB to mount a full review of accounting for financial instruments Auditor training membership of working group to move debate forwards IASB reporting performance response to consultation on this crucial topic IASB consolidations response to consultation to seek a more considered approach 16 EOS Public Engagement Report Q2 2009

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 analyses. 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 for PNO Media Over the last quarter, we voted at a total of 1,053 meetings around the world, analysing 12,261 resolutions. At 468 of those meetings we opposed one or more resolutions and we abstained at two meetings. We voted with management by exception at eight meetings, while we supported management on all resolutions at 575 meetings. North America We voted at 397 meetings (3,930 resolutions) over the quarter. 2% South America We voted at one meeting (24 resolutions) over the quarter. Asia (except Japan) We voted at 44 meetings (404 resolutions) over the quarter. 3% 20% 41% 57% 100% 77% Japan We voted at 132 meetings (1,976 resolutions) over the quarter. Western Europe We voted at 396 meetings (4,807 resolutions) over the quarter. UK We voted at 83 meetings (1,120 resolutions) over the quarter. 7% 1% 53% 47% 49% 51% 92% Global We voted at 1,053 meetings (12,261 resolutions) over the quarter. 1% 44% 55% 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 Q2 2009

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