Excellence. Responsibility. Innovation.
Q2 2016
Hermes EOS
Public Engagement Report
Money talks – Reforming executive remuneration
www.hermes-investment.com
Hermes EOS
This report contains a summary of the stewardship
activities undertaken by Hermes EOS on behalf of
its clients. It covers significant themes that have
informed some of our intensive engagements with
companies in Q2 2016.
The report also provides information on voting
recommendations and the steps we have taken
to promote global best practices, improvements
in public policy and collaborative work with other
long-term shareholders.
2 Preface
10 Governance
What is Hermes EOS?
Money talks – Reforming
How does Hermes EOS work?
executive remuneration
3 Hermes EOS team
12 Strategy
Our team
Aiming for change – Stewardship
in the mining sector
4 Engagement by region
Engagement statistics by region
14 Business strategy
Engagement on strategy and
5 Engagement by issue
governance issues
Engagement statistics by issue
16 Public policy
6 Environment
Public policy and best practice
Fighting fires – Pushing for
sustainable palm oil production
19 Overview
Regional voting statistics
8 Social
Safety first – Update on supply
chain management in Bangladesh
www.hermes-investment.com | 1
Public Engagement Report: Q2 2016
What is Hermes EOS?
How does Hermes EOS work?
Hermes EOS helps long-term institutional investors around the world
Our corporate, public policy and best practice engagement
to meet their fiduciary responsibilities and become active owners of
programmes aim to enhance and protect the value of our clients’
public companies. Our team of engagement and voting specialists
investments and safeguard their reputations. We measure and monitor
monitors our clients’ investments in companies and intervenes
progress on all engagements, setting clear objectives and specific
where necessary with the aim of improving their performance and
milestones for our most intensive engagements. In selecting companies
sustainability. Our activities are based on the premise that companies
for engagement, we take account of their environmental, social and
with informed and involved shareholders are more likely to achieve
governance risks, their ability to create long-term shareholder value
superior long-term performance than those without.
and the prospects for engagement success.
Pooling the resources of other like-minded funds creates a strong and
The Hermes Responsible Ownership Principles1 set out our fundamental
representative shareholder voice and makes our company engagements
expectations of companies in which our clients invest. These cover
more effective. We currently act on behalf of 42 clients and £188.9
business strategy, communications, financial structure, governance
billion* in assets under advice.
and management of social, ethical and environmental risks. The
engagement programme we have agreed with our clients, as well as
Hermes has one of the largest stewardship resources of any fund
the Principles and their regional iterations, guide our intervention
manager in the world. Our 26-person team includes industry
with companies throughout the world. Our approach is pragmatic,
executives, senior strategists, corporate governance and climate change
company- and market-specific, taking into account the circumstances
experts, ex-fund managers and lawyers.
of each company.
The depth and breadth of this resource reflects our philosophy that
We escalate the intensity of our engagement with companies over
stewardship activities require an integrated and skilled approach.
time, depending on the nature of the challenges they face and the
Intervention at senior management and board director level should be
attitude of the board towards our dialogue. Some engagements involve
carried out by individuals with the right skills, experience and credibility.
one or two meetings over a period of months, others are more complex
Making realistic and realisable demands of companies, informed by
and entail multiple meetings with different board members over
significant hands-on experience of business management and strategy
several years.
setting is critical to the success of our engagements.
At any one time around 360 companies are included within our core
We have extensive experience of implementing the Principles for
engagement programmes. All of our engagements are undertaken
Responsible Investment (PRI) and various stewardship codes. Our chair
subject to a rigorous initial assessment and ongoing review process
Colin Melvin led the committee that drew up the original principles and
to ensure that we focus our efforts where they can add most value for
we are actively engaged in a variety of workstreams through the PRI
our clients.
Clearinghouse. This insight enables us to help signatories in meeting
the challenges of effective PRI implementation.
While we can be robust in our dealings with companies, the aim is
to deliver value for clients, not to seek headlines through campaigns,
which could undermine the trust that would otherwise exist between
a company and its owners. We are honest and open with companies
about the nature of our discussions and aim to keep these private.
Not only has this proven to be the most effective way to bring about
change, it also acts as a protection to our clients, so that their positions
will not be misrepresented in the media.
For these reasons, this public report contains few specific details of
our interactions with companies. Rather it explains some of the most
important issues relevant to responsible owners and outlines our
activities in these areas.
We would be delighted to discuss Hermes EOS with you in greater detail.
For further information please contact:
Co-Head Dr Hans-Christoph Hirt on +44(0)207 680 2826
Co-Head Emma Hunt on +44(0)207 680 4686
* as of 30 June 2016
1 https://www.hermes-investment.com/wp-content/uploads/2015/09/the-hermes-ownership-principles.pdf
2
Hermes EOS
Hermes EOS team
Leadership
Dr Hans-Christoph Hirt
Emma Hunt
Bruce Duguid
Co-Head
Co-Head
Director
Sector lead: Mining, Utilities
Sectors: Oil and Gas,
Pharmaceuticals
Tim Goodman
James O’Halloran
Carl Short
Director
Director
Director of Engagement
Sector lead: Oil and Gas
Head of Voting and
Sectors: Financial Services,
Engagement Support
Mining
Engagement professionals
Dr Emma Berntman
Roland Bosch
Darren Brady
Sectors: Financial Services,
Sector lead: Financial
Sector lead: Technology
Mining, Oil and Gas,
Services
Sectors: Oil and Gas,
Pharmaceuticals, Utilities
Sectors: Consumer Goods
Pharmaceuticals
and Retail
Dominic Burke
Christine Chow
Natacha Dimitrijevic
Sector lead: Consumer
Sectors: Financial Services,
Sector lead: Pharmaceuticals
Goods and Retail
Mining, Oil and Gas,
Sectors: Consumer Goods
Sectors: Financial Services,
Technology
and Retail, Financial Services,
Utilities
Industrials, Oil and Gas
Jaime Gornsztejn
Sachi Suzuki
Dr Michael Viehs
Sectors: Mining, Oil and Gas,
Sector lead: Industrials
Sectors: Industrials,
Technology, Utilities
Sectors: Technology
Mining, Oil and Gas,
Pharmaceuticals, Utilities
Maxine Wille
Sectors: Financial Services,
Industrials, Pharmaceuticals,
Technology
Business Development and Client Service
George Clark
Alan Fitzpatrick
Rochelle Giugni
Voting and Engagement
Client Relations
Client Relations
Support
Bram Houtenbos
Amy Lunn
Nina Röhrbein
Voting and Engagement
Head of Business and
Reporting and
Support
Client Development
Communications
Lucy Saville
Client Relations
www.hermes-investment.com | 3
Public Engagement Report: Q2 2016
Engagement by region
Over the last quarter we engaged with 298 companies on 579
environmental, social, governance and business strategy issues.
Our holistic approach to engagement means that we 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.
Global
We engaged with 298 companies over the
last quarter.
Environmental 15.2%
Social and ethical 20.6%
Governance 49.9%
Strategy and risk 10.7%
Stewardship 3.6%
Developed Asia
Emerging and Frontier Markets
Europe
We engaged with 39 companies over the last quarter.
We engaged with 40 companies over the last quarter.
We engaged with 62 companies over the last quarter.
Environmental 5.6%
Environmental 19.4%
Environmental 14.8%
Social and ethical 27.1%
Social and ethical 26.9%
Social and ethical 16.7%
Governance 49.5%
Governance 28.0%
Governance 56.5%
Strategy and risk 10.3%
Strategy and risk 20.4%
Strategy and risk 10.2%
Stewardship 7.5%
Stewardship 5.4%
Stewardship 1.9%
North America
United Kingdom
We engaged with 97 companies over the last quarter.
We engaged with 60 companies over the last quarter.
Environmental 16.7%
Environmental 19.1%
Social and ethical 14.7%
Social and ethical 20.9%
Governance 62.8%
Governance 44.3%
Strategy and risk 3.8%
Strategy and risk 13.0%
Stewardship 1.9%
Stewardship 2.6%
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Hermes EOS
Engagement by issue
A summary of the 579 issues on which we engaged with companies
over the last quarter is shown below.
Environmental
Social and ethical
Governance
Environmental issues featured in 15.2% of our
Social issues featured in 20.6% of our
Governance issues featured in 49.9% of our
engagements over the last quarter.
engagements over the last quarter.
engagements over the last quarter.
Biodiversity 4.5%
Access to medicine 2.5%
Board structure 33.2%
Climate change/carbon intensity 67.0%
Bribery and corruption 9.2%
Committee structure 0.3%
Environmental management 19.3%
Community relations 12.6%
Conflicts of interest 1.4%
Forestry 2.3%
Corporate culture 8.4%
Other governance 23.2%
Oil sands 2.3%
Customer relations 10.1%
Poison pill 1.0%
Waste 2.3%
Water stress 2.3%
Diversity 2.5%
Related-party transactions 0.3%
Health and safety 16.8%
Remuneration 33.2%
Labour rights/employee relations 9.2%
Separation of chair/CEO 3.5%
Licence to operate 10.9%
Succession planning 3.8%
Munitions manufacture 0.8%
Operations in troubled regions 2.5%
Political risk management 0.8%
Supply chain management 13.4%
Strategy and risk
Stewardship
Strategy and risk issues featured in 10.7% of our
Stewardship issues featured in 3.6% of our
engagements over the last quarter.
engagements over the last quarter.
Business strategy 37.1%
Accounting or auditing issues 19.0%
Capital structure 3.2%
Shareholder communications 66.7%
Reporting/disclosure 9.7%
Shareholder rights 14.3%
Reputational risk 4.8%
Returns to shareholders 1.6%
Risk management 43.5%
www.hermes-investment.com | 5
Public Engagement Report: Q2 2016
Fighting fires – Pushing for
Setting the scene
sustainable palm oil production
Palm oil is a versatile commodity that can be found in everyday
products from chocolate to shampoo. It is the world’s most widely
used vegetable oil, accounting for 65% of all vegetable oil traded
In our longstanding engagement
internationally, according to WWF. The efficient crop produces the
onment
most edible oil per hectare of land2 and so has proven profitable
vir
En
with producers of palm oil, we
for its cultivators, which is why the palm oil plantation business
has been expanding rapidly.
have pressed them to adopt
However, the development of palm oil, the vast majority of which
sustainable business practices.
is produced in Malaysia and Indonesia, has been accompanied by
controversies. While in Malaysia the business expanded largely
We have also engaged with some by converting former rubber plantations to ones growing palm
oil, in Indonesia the development of palm oil plantations has
of their customers on the issue.
involved the destruction of primary forest of native tree species.
Palm-oil producing companies and small-scale farmers have
been accused by NGOs and other organisations of starting fires
deliberately to clear existing vegetation to make room for new
palm oil plantations. The fires have become so widespread they are
known as the Southeast Asian haze. In addition, producers have
allegedly been involved in land-grabbing and disputes with local
communities when developing new plantations. Others have faced
accusations of poor working practices in and a lack of oversight of
their supply chains. However, the industry also provides significant
employment to local people, as well as infrastructure.
As companies were not certified when we began our dialogue on
sustainable palm oil, we set objectives on RSPO certification. We are
pleased that since our engagements started, the Malaysian palm oil
plantations of companies we have had dialogue with and some of
whose operations we were able to visit, have obtained 100% RSPO
As local regulators have been slow to date to introduce strict legislation
certification. However, due to land registry disputes or technical issues,
on palm oil, in our engagement, we have urged companies to produce
full certification has been more difficult to achieve in Indonesia.
and sell only sustainable palm oil and to follow best practice guidelines.
To mitigate reputational risk, we have also encouraged their customers
Sustainable Palm Oil Manifesto
to buy from companies producing sustainable palm oil.
Furthermore, pressure from asset owners and investor representatives
like ourselves contributed to the Sustainable Palm Oil Manifesto,
Certification
which launched in 2014 and aims to build on the existing sustainability
In 2004, the Roundtable for Sustainable Palm Oil (RSPO), a multi-
commitments of RSPO signatories.
stakeholder forum, which includes palm oil producers, NGOs and
banks, was set up with the aim of promoting the growth and use
The manifesto seeks to achieve common objectives held by key
of sustainable palm oil products. It offers a certification scheme for
stakeholders in the palm oil industry, such as growers, traders,
growers to prove that their palm oil is produced in a sustainable
processors and end-users, to ensure sustainability in the entire chain
manner. Producers are required to meet a number of criteria on
from cultivation to consumption. It commits palm oil producers and
environmental impact, including on biodiversity and carbon emissions,
traders to refrain from deforestation of high carbon stock (HCS) forest,
as well as on social matters, for example the rights of workers and local
as defined by a study, to create traceable and transparent supply
communities. However, to date approximately only 21% of global palm
chains and to protect highly fertile peat areas. The manifesto also
oil is RSPO-certified and questions have been raised about the RSPO’s
requires companies to ensure continuous positive economic and social
work and robustness of its certification criteria, for example that it does
benefits for the local communities living near palm oil plantations.
not take into account greenhouse gas emissions and that certification
Signatories have to prepare their own time-bound plan to implement
does not guarantee that the palm oil in a product is deforestation- or
these principles within 12 months of signing but are free to adopt a
exploitation-free. Nevertheless, we believe that the organisation has
reasonable timeframe to achieve their objectives. They also have to
helped raise awareness about the challenges of palm oil production and
publish their time-bound plans and file regular progress reports.
made meaningful changes to the way the industry operates.
Progress in selected engagements
If any RSPO members are negligent in their plantations, they face
As a result of the pressure from investors and customers, as well as the
expulsion from the certification group. While a recently expelled
above-mentioned initiatives, in our engagement with companies on
member continues to sell crude palm oil without RSPO certification,
sustainable palm oil, we have witnessed significant progress.
several major global companies have stopped buying from it and it was
placed on review for downgrade by credit ratings agency Moody’s.
6
Hermes EOS
Golden Agri-Resources
we noted the company’s lack of public disclosure of this and other
In 2009, a report by Greenpeace alleged that Southeast Asian palm
sustainability issues and urged it to publish a policy commitment,
oil giant Golden Agri-Resources (GAR) was contributing to large-scale
highlighting the significance of reputational risks facing palm oil
deforestation in Indonesia, where it owns nearly 500,000 hectares. This
producers. We continued our discussion on its progress in obtaining
resulted in a number of its customers, including Unilever, Nestlé, Kraft and
RSPO certification for all of its plantations, to ensure that the company
Burger King cancelling their contracts. Although they made up less than 3%
was on track to meet its targets.
of GAR’s revenue, the incident tarnished the company’s reputation.
In 2014, the company became a signatory to the Sustainable Palm Oil
We commenced engagement with GAR in 2009. We focused on the
Manifesto. This was followed by an announcement that the signatory
objective of ensuring RSPO certification for all of its palm oil and on
companies would halt development of potential HCS areas while the
putting together a credible strategy to address wider sustainability
HCS study was underway. In addition, KLK obtained RSPO certification
allegations, including the setting of stretching targets. We also pressed
for all of its plantations and mills in Malaysia and is working on
GAR to dedicate more resources to the issue of sustainable palm oil.
meeting this target for Indonesia. We welcomed the publication of the
company’s first sustainability policy and its intention to engage with
In 2010, the company committed to certifying all of its plantations to
its contractors and suppliers to ensure their adherence to the policy.
RSPO standard by 2015. A year later, it developed a forest conservation
Furthermore, KLK has vastly improved its reporting, including the
policy to ensure sustainable growth and gained RSPO membership. It
disclosure of fires within its plantations.
also worked with Greenpeace and The Forest Trust on a different version
of HCS, which classifies land and sets out which vegetation types have
Public policy engagement
more or less carbon content than a plantation. This helps identify where
While we have seen improvements at the company level, it is
palm oil development would contribute to carbon storage. In addition to
important not to forget the role governments can play. By creating
these commitments, GAR pledged to oversee a wider cultural change in
legislation and supporting a change in farming of smallholders, they
its attitude to environmental sustainability. This included ensuring that its
can pave the way to sustainable palm oil production. As part of our
lead independent director would oversee environmental and social risks
engagement, we jointly signed a letter to the Indonesian government
and that the company’s environmental commitment would be driven by
calling on it to make sustainable palm oil practices compulsory. As
a culture of awareness of the importance of sustainability at the board
part of the collaborative engagement on palm oil led by the Principles
level. The company also nominated an executive director responsible for
for Responsible Investment, we have met indigenous community
sustainability issues to enhance the board’s reporting. Unilever and Nestlé
representatives from tropical forests in Indonesia, Colombia, Peru and
resumed buying from GAR in 2011.
Liberia, to listen to their concerns – related to land-grabbing, human
In 2012, we conducted a site visit to GAR plantations in the Riau
rights violations, deforestation and contamination of land and water –
region of Indonesia to inspect its methods of consultation with
and investigate their claims further.
the local community and management of impacts on carbon
Ongoing challenges
emissions, as well as to assess whether its commitment to full RSPO
certification by 2015 was sufficiently stretching. Following the visit,
However, challenges remain. One of the biggest is the oversight and
we engaged the company’s senior independent director to urge
control of small-scale farmers who often work on concessionary
the board to publish a time-bound action plan for implementation
lands of global companies. These smallholders typically supply
of its sustainability strategy. GAR understood the importance of
local customers who may not be interested in sourcing palm oil
demonstrating its commitment to sustainability and agreed to
in a sustainable manner and lack investors who could pressure
strengthen its standard operating procedures on sustainability matters.
them on sustainability. This makes it difficult for them to see the
potential economic benefits of producing sustainable palm oil. Large
We continue to monitor the company as it has begun palm oil
companies may have zero burning policies in place but smallholders on
operations in Africa, which raises new challenges and requires different
concessionary lands can still choose to ignore these.
approaches to be developed beyond those in Asia.
We continue to engage with large palm oil producers to seek their
Kuala Lumpur Kepong
help in extending best practice to smallholders, while putting pressure
Our engagement with Malaysian multi-national Kuala Lumpur Kepong
on the regulators to raise industry standards. We urge the laggards in
(KLK) was sparked in 2012 by allegations of illegal logging of an
the industry to catch up with its leaders and push to ensure that the
Indonesian peat forest in violation of a two-year moratorium by one of
companies in our engagement programme achieve full RSPO certification
its subsidiaries. In addition, a contractor of KLK was accused of operating
in Indonesia. Furthermore, we engage with the companies to ensure that
slave labour-like conditions at its palm plantations, allegations which KLK
they apply best practice standards in new sourcing markets where they
has denied. The company has also been accused of failing to respect the
expand their palm oil activities, such as Africa and Latin America.
rights of community groups in Papua New Guinea and Liberia.
For further information, please contact:
Throughout our engagement, we have pressed the company to
implement better labour standards in its supply chain. While denying
the allegations of labour abuses by one of its contractors, KLK
confirmed that it had terminated its contract with the contractor
concerned and provided us with a document intended for its customers
explaining its labour practices. We welcomed its efforts to reduce the
use of contract workers, improve communications with customers
Sachi Suzuki
and engage with NGOs. We were also encouraged by the significant
xxxxx.xxxxxx@xxxxxxxxxxxxxxxxx.xxx
amount of time the board spent discussing these issues and the visits
to the estates by directors to gain first-hand experience. However,
2 Sustainable path: Who is leading palm-oil reform?, CLSA Blue Books 2016
www.hermes-investment.com | 7
Public Engagement Report: Q2 2016
Safety first – Update on supply chain
Setting the scene
management in Bangladesh
It has been over three years since the eight-storey Rana Plaza
building in Bangladesh’s capital Dhaka collapsed, taking with it
the lives of over 1,100 garment workers that were on its premises
We have been engaging
producing clothes for global retailers. In its wake, two initiatives
Social
were set up, the Alliance for Bangladesh Worker Safety (Alliance),
with garment retailers for
which was founded by North American retailers and brands, and
the Bangladesh Accord on Fire and Building Safety (Accord), which
stronger labour standards and
has mainly Asian, Australian and European company signatories.
Both initiatives set out binding, five-year undertakings that aim
supply chain management in
to improve safety in ready-made garment factories in the country
through inspections and audits.
Bangladesh and beyond.
On the third anniversary of the collapse of the Rana Plaza building,
we signed a joint investor statement addressed to companies that
are members of the Alliance and Accord. While acknowledging
the positive steps taken towards improving the safety of workers,
the statement highlighted remaining concerns about the pace of
progress in addressing systemic issues and called for further action
from international brands. This includes the provision of financial
support to suppliers where appropriate, the establishment
of independent safety committees in factories to sustain
improvements that have been made and the public disclosure of
factories in their supply chains.
We visited a number of international brands, their suppliers and
other stakeholders in Bangladesh in late 2014 to understand the
issues on the ground. Three years on from the accident, we reflect
on what has been happening in the sector and how the focus of
our engagement with companies has shifted.
We are therefore pleased that advances have been made in the
transparency of supply chains. Several companies in our engagement
programme have completed the mapping of their supply chains
through to tier 2 and 3 suppliers, covering ancillary processes such as
washing and dyeing, as well as fabric mills.
Progress
Encouragingly, some retailers have gone beyond the requirements
After the 2013 Rana Plaza disaster in Bangladesh, the primary aim of
of the Accord and Alliance and undertaken their own auditing and
retail companies and their stakeholders was to improve health and
structural surveys of all their suppliers, including those for which they
safety standards in the garment manufacturing sector.
are not the lead buyer.
Immediate structural safety issues, such as the provision of escape
Positive steps have also been taken by some retailers in response to
routes and exit doors in factories, negligence of which has led to
the refugee crisis in Europe and the Middle East. Refugees entering the
companies being fined in the past, have now been addressed by the
supply chain illegally are vulnerable to exploitation, which is why some
companies we have been engaging with. However, the rate of progress
retail companies have been working with local NGOs and auditors to
when looking at all outstanding remediation required ahead of the
identify and redress instances and provide disclosure on this matter.
expiry of the Alliance for Bangladesh Worker Safety (Alliance) and the
Bangladesh Accord on Fire and Building Safety (Accord) in 2018 has
Workers’ rights
been slower than expected.
In view of the improvements in structural safety and oversight, our
engagement focus has shifted to the rights of workers in supply chains
Commonly cited obstacles include the limited availability of certified
and how the dynamics between suppliers and brands can be improved
specialists, such as engineers, and delays in obtaining materials and
to sustain and encourage best practices.
equipment such as fire doors, although we understand from the Accord
that these are being overcome.
As unions have traditionally been largely absent from Bangladesh,
we have pushed for the rights of workers to organise and represent
Oversight
themselves collectively. Our 2014 visit to the country had given us
In our engagement, we have pushed for oversight of sustainability
concern about how effectively worker participation committees were
risks in supply chains by retail companies and their boards through
functioning in factories, which we fed back to the retail companies we
ambitious targets and tracking of progress at the group level.
spent time with and called for further action on.
8
Hermes EOS
A couple of companies have since signed agreements with global
reporting and the US Business Supply Chain Transparency on Trafficking
unions to provide more effective support to workers and their
and Slavery Act. We believe that the benchmark can encourage
representatives, such as negotiation training. However, we also want
the provision of better quality and comparable information from
to see improvements in factory human resource processes, including
companies to inform our engagement with and assessment of them, as
the training of supervisors and the introduction of meaningful metrics
well as incentivising businesses to adopt best practices from peers.
which provide insights into the management of workers.
New market challenge
Productivity
A key test of companies’ progress is the extent to which they embed
Another significant issue in the supply chain has been the poor
best practices in new sourcing markets and apply the lessons learned
productivity of workers, in other words the output per employee.
from their experience in Bangladesh and elsewhere. In Myanmar, for
During our 2014 visit, two of the retail brands we met told us that
example, several companies entering the country have petitioned the
productivity is lower in Bangladesh than in their other sourcing
government to introduce a living wage for the textile industry, in a
markets, in part due to faults in the production of garments.
demonstration of their commitment to staying there.
Efforts by some retailers to increase wages indicate that this can
We will explore this issue with companies considering or already
enhance productivity, with trials finding that output and efficiency
sourcing from this market and seek to visit factories on the ground at
increase, while costs associated with employee turnover decrease due
some point in the future.
to investment in the training of workers, as well as supervisors, on
management practices.
We will also focus our engagement increasingly on the environmental
challenges facing factories in the supply chain, such as water and
Order volatility also remains one of the biggest pressures on suppliers
waste management, as well as parts of the supply chain previously not
and in our engagements, we urge brands to address volatile buying
scrutinised, such as tanneries.
practices and insecure short-term relationships.
For further information, please contact:
Longer-term planning can provide suppliers with the certainty to invest
in employee and processes, driving standards, while also offering more
competitive pricing to buyers. Recognising this Swedish, multi-national
retailer H&M is committing to five-year agreements with suppliers
that perform highly on sustainability and to three-year plans for the
next tier. We will continue to monitor H&M’s progress in this area and
encourage other brands to improve their buying practices.
Dominic Burke
Trying to address labour standards in its Bangladesh supply chain
xxxxxxx.xxxxx@xxxxxxxxxxxxxxxxx.xxx
may have also led US retailer Wal-Mart to improve human capital
management across its business, increasing the pay of many
of its store staff and investing substantially in staff training and
career development.
Reporting
In our engagements, we encourage companies to adopt the UN
Guiding Principles on Business and Human Rights Reporting Framework
in order to effectively communicate how they manage human rights
impacts, ranging from child labour to women’s rights and workplace
harassment. We supported the development of the principles through
our participation in the Shift Project. Speaking on a panel with
several companies we engage with at an EU conference on human
rights, we were pleased to hear about the benefits of the framework
as an internal management tool, which supports their engagement
with investors and other stakeholders. We called for consistency in
the implementation and guidance of non-financial reporting across
different markets, including on human rights, while cautioning against
a too prescriptive focus on common metrics or data points. In our
experience human rights impacts vary greatly between companies,
sectors and geographies and so we suggested that companies should
have the flexibility to report meaningfully and qualitatively on the risks
and impacts most salient to their operations.
We have also supported the development of the Corporate Human
Rights Benchmark which ranks the top 500 companies globally on
the basis of their human rights risk management and disclosure.
This complements a number of other initiatives seeking to drive
transparency and better performance on social issues, such as the
Modern Slavery Act in the UK, the above-mentioned UN Guiding
Principles reporting framework, the EU directive on non-financial
www.hermes-investment.com | 9
Public Engagement Report: Q2 2016
Money talks – Reforming executive
Setting the scene
remuneration
In 2012, UK companies found themselves caught up in the so-
called shareholder spring. Unhappy with what they perceived to
be excessive amounts of executive pay or packages that were
In our engagements with
too complex or out of sync with the economic climate and value
vernance
creation, shareholders started voicing their frustration by voting
Go
companies across sectors and
more frequently against remuneration reports at company AGMs.
regions, we continue to push for
The shareholder spring was perceived to be a game-changer. In
the UK, it led to new legislation in 2013, resulting in a binding
reforms to executive pay.
vote on a company’s pay policy by shareholders at least every
three years. Together with the Pensions and Lifetime Savings
Association, the BT Pension Scheme, Railpen Investments and the
Universities Superannuation Scheme, Hermes EOS developed a set
of remuneration principles for executives in the aftermath of the
shareholder spring.3
However, the impact of the 2012 shareholder spring turned out
to be short-lived and executive pay has continued to increase,
particularly in comparison with the rest of the workforce [see
table]. Often this has led to higher levels of remuneration for
average performance and reward for failure. To the ultimate
beneficiary of institutional investors this trend has been difficult
FTSE 100 CEO received to average employee 2002 – 2014
to justify and frustration about the widening pay gap and related
divisions in society may have contributed to the decision made by
Year
CEO total remuneration
Shareholder voting %
UK voters to leave the EU.
received as multiple of
dissent (abstain + oppose)
average employee earnings
on remuneration
2002
69.51
16.19
engagement on high pay with votes against management proposals
2003
77.08
12.83
on remuneration.
2004
94.16
7.38
Although remuneration frameworks vary by country – most notably
2005
97.62
5.19
with regard to disclosure, pay caps and, crucially, the existence and
2006
98.75
6.08
legal effect of shareholder votes on pay policies and reports – and
2007
139.16
7.14
concerns differ accordingly, several trends have stood out this
2008
124.32
10.06
voting season.
2009
151.68
9.38
First, we observed the misalignment of executive pay to the experience
2010
132.22
9.07
of shareholders and creation of long-term value. Due to the downturn
2011
117.50
11.34
in the commodities sector, this applied especially to extractives
2012
114.35
7.55
companies, such as Anglo American and BP, and those providing goods
2013
125.38
9.08
or services to the industry, such as Weir Group. Secondly, we witnessed
2014
149.58
8.38
the overuse of discretion upwards by remuneration committees
when it should not be used or lack of discretion when it needed to be
Source: Manifest, High Pay Centre ‘Pay ratios – Just do it’
applied, for instance where quantum is already large. We, for example,
http://highpaycentre.org/pubs/pay-ratios-just-do-it
opposed the pay package at Tullow Oil for failure to use discretion
downwards in a year, which, in our view, displayed poor performance.
The annual bonus and long-term incentive plans of executives
In addition, we recommended voting against remuneration policies
typically pay many multiples of their base salary, even in years where
where the assessment and stress-testing of pay packages and policies
companies underperform. Often the root cause of overly generous pay
by remuneration committees was in our view flawed and quantum was
and reward for failure lies in the remuneration policies of companies
inappropriate and unacceptable to us.
which are supposed to align the remuneration of the CEO with the
performance of the company he or she is leading. Executive pay plans
One of the most controversial votes cast against in the 2016 voting
have become increasingly – and unnecessarily – complex and difficult
season was at the AGM of UK multinational advertising agency WPP,
to understand even for members of remuneration committees. At the
with which we have a longstanding engagement on independent
same time, remuneration committees have mostly failed to fulfil their
board leadership, succession planning and the responsibilities of its
responsibilities by using their discretion to reign in ever-increasing
remuneration committee. The proposed £70 million pay package for
pay awards.
2015 has to date been the second-highest pay package ever received
by a FTSE CEO. The large quantum could primarily be attributed
Voting season 2016
to a legacy equity incentive plan introduced in 2009 which is to be
In the 2016 voting season, similar to 2012, a large number of
phased out in 2017. However, while we appreciate that the quantum
shareholders opposed the pay policies and reports of companies
was primarily a result of the company’s strong performance in
and called for reforms, reflecting the public anger to high levels of
recent years, we had historic concerns about board composition and
pay. We at Hermes EOS played a part in this, by complementing our
the remuneration committee’s apparent lack of vigour and stress-
10
Hermes EOS
testing when the legacy plan was devised. We urged the chair of the
applied to explain CEO pay and how it compares to the rest of the
remuneration committee to draw the right lessons from this controversy
workforce and why it is justified.
when developing a new remuneration policy in 2017 and, like last year,
opposed the proposed pay package for assessment and quantum reasons.
In short, the objective of remuneration policy is no longer to attract,
retain and motivate an individual but to pay what is necessary while
Another highlight of the voting season was the AGM of Deutsche
rewarding delivery of great performance.
Bank, where we commended the supervisory board for not paying
any bonuses to the members of the management board in 2015.
Stewardship
However, we were concerned about the significant increases in base
We believe that there is a significant appetite for change and urge
salaries in recent years, the apparent lack of consultation on the
companies to consider how they might align pay more closely with the
proposed changes to the management board remuneration system,
interests of their long-term owners in order to position themselves best
the inadequate transparency in relation to performance criteria and
for future success.
targets of the proposed division performance award, as well as the
high level of discretion of the supervisory board with regard to variable
The ownership chain should endeavour to understand and reflect
remuneration. We were therefore part of the 51.9% of shareholders
the views and interests of the ultimate beneficiaries, including with
who opposed the new remuneration system.
respect to the question of what executive remuneration levels are
acceptable. In the absence of direct involvement of beneficiaries,
Reform proposals
boards or trustees of asset owners could develop a clearer view on
At the beginning of this year’s AGM season, we issued additional
executive remuneration, including on quantum, and instruct their
guidance to clarify our expectations of remuneration committees.
fund managers to communicate this to companies and exercise voting
We highlighted that developing, thoroughly assessing and stress-
rights accordingly.
testing, implementing and – if necessary – adjusting the outcomes of
The conflicts asset managers can face, specifically when they are listed
remuneration policies is the responsibility of remuneration committees
or are part of a financial group, ought to be addressed, for example
– not of investors.4
through better disclosure on how published policies on executive
To effectively discharge their stewardship role, remuneration
remuneration can be implemented through voting at AGMs.
committees must take a more robust view on pay.
Fresh thinking
They must improve their assessment and stress-testing of
To address inequalities and the rise in quantum, pay ratios, which will
remuneration policies and the disclosure and communications of
come into effect for US companies in 2018, should also be considered.
outcomes of different, even unlikely, scenarios. If their members are
Under the rule adopted by the US Securities and Exchange Commission
unable to do so, this suggests that remuneration policies have become
as required by the Dodd-Frank Act, large companies will have to
far too complex and unnecessarily complicated. A simplification
disclose how salaries at the top compare to their median compensation
of remuneration policies and plans – which allows outcomes to be
level for employees worldwide.
understood by investors, boards and executives – has thus become
necessary. If remuneration committees do not understand the potential
Furthermore, pay-for-performance ought to be disentangled, in other
outcomes of a pay policy, or would struggle to rationalise proposed
words it has to be clearly defined as to whether it is about individual or
quantum, they should veto it. And if the actual outcomes of a policy
company performance.
cannot be explained convincingly to the average member of the public
or implementation leads to results that contradict the underlying
Engagement and voting
purpose of a remuneration policy, they should use their discretion to
However, engagement reinforced by voting is likely to be the most
adjust them. At all times, they should use discretion to safeguard their
effective means of bringing about positive change when it comes to
company’s reputation and social licence to operate in a given market.
remuneration. With another round of binding shareholder votes on pay
policies taking place in the UK in 2017, we will continue our intensive
Remuneration committees must also balance the desire to set some
engagement on remuneration for the remainder of 2016.
targets that can be controlled by executives with the need to ensure
alignment of remuneration and long-term value creation. We have long
We seek to support companies and their directors embracing change
argued that paying a significant part of remuneration to executives in
as we believe pay arrangements that reward long-term value creation
shares and requiring them to hold these well beyond their tenure with
instead of average performance – and are acceptable within the wider
companies is a natural starting point to ensure the desired alignment.
society – are in the interests of companies and their investors.
In addition, remuneration committees must form a view on what they
For further information, please contact:
regard as appropriate and acceptable quantum for executives in different
scenarios and clearly disclose and communicate this to shareholders.
Shareholders can then take a view on this important matter.
Pay escalation is often linked to succession plans, as companies believe
they can hold onto their CEO by paying excessive amounts to the
individual. However, in our view the head of a company should not
be purely incentivised by money, as this is neither in the interests of
Dr Hans-Christoph Hirt
shareholders nor the company. At times this excuse has been used to
xxxxxxxxxxxxxx.xxxx@xxxxxxxxxxxxxxxxx.xxx
increase pay when there was little chance of the CEO leaving. While
we recognise that companies want to pay their CEOs more than their
competitors, businesses need to realise that remuneration alone does
3 https://www.hermes-investment.com/wp-content/uploads/2016/03/Remuneration-
not attract great talent. Ideally, some form of fairness test should be
Principles-PLSA-NAPF-March-2016-update.pdf
4 https://www.hermes-investment.com/ukw/blog/2016/04/21/executive-remuneration-in-
the-spotlight/
www.hermes-investment.com | 11
Public Engagement Report: Q2 2016
Aiming for change – Stewardship in
Setting the scene
the mining sector
Much of the world’s higher grade mineral resources can be found
in the more remote parts of developing nations, where there is
frequently poor infrastructure and weak governance. Operators
In our engagement with mining
can therefore face significant local environmental and social
risks. While best practices can help mitigate many of these risks,
Strategy
companies, we focus on a variety climate change presents a number of structural challenges that
require a whole-business response. The first of these is the energy
of issues, ranging from climate
and therefore carbon-intensive nature of mining itself, which
involves shifting large quantities of bulky materials, followed by
change to health and safety and
their processing and smelting. The threat of carbon pricing is a
significant business risk and mining companies must focus on
governance.
energy efficiency and renewable energy solutions. The second
threat is to the demand of the products, which often are the cause
of emissions, such as coal, or which may be substituted by other,
lower-carbon and lighter materials, for example aluminium for
steel. The good news for mining companies is that while some
commodities appear threatened by the move to a low-carbon
economy, others should do better, such as copper, which supports
better grid infrastructure and the electrification of transport,
uranium, which is used in nuclear power generation and lithium
and cobalt, which are used to make batteries for electric vehicles.
major company regarding preparedness for the challenges of climate
change. The scenario-based analysis underpinning this publication
was the result of a successful engagement by Hermes EOS in 2014.
Somewhat reassuringly for investors, due to BHP Billiton’s well-
diversified portfolio, the work set out that even in a more extreme 2°C
scenario with a cost of carbon of $80/tonne – the latest cost of carbon
in the EU emissions trading scheme was €5.60/tonne on 30 June
2016 – climate change is estimated to reduce the operating margins
of the company over a 20-year period by approximately only 5%.
While demand for some commodities is anticipated to fall in a lower-
carbon economy, the company expects it to rise for others. We have
used this precedent to encourage the company’s peers to carry out a
similar exercise.
Shareholder resolutions
As part of the Aiming for A coalition of investors, we filed climate
change-related shareholder resolutions at oil and gas majors BP
and Shell in 2015 in the belief that carefully crafted, supportive but
Disclosure of climate change risks
stretching shareholder proposals can play a positive role in encouraging
Mitigating the risks mining companies face from climate change has
best practice during the transition to a low-carbon economy. Such
been a core part of our engagements with companies. We have focused
resolutions also highlight the need to balance the short- and longer-
on improving corporate reporting of climate risks, setting an objective
term aspects of shareholder value creation. Throughout 2015, we raised
relating to the disclosure of asset portfolio resilience to climate change
the idea of filing similar resolutions on the disclosure of asset portfolio
for several of the mining companies in our engagement programme.
resilience to climate change with the chairs of three major diversified
mining companies, namely Anglo American, Glencore and Rio Tinto, all
We have asked companies to stress-test their portfolios – analysing
of which are listed in London.
their assets to see how they would perform in different circumstances
– using recognised greenhouse gas emissions scenarios, such as those
Board support increases the likelihood that a resolution will be passed
developed by the International Energy Agency. This includes analysis of
and ensures management will be committed to implementing the
their existing portfolios, as well as the new pipeline of products over a
resolution. While each chair indicated his informal personal backing
period to at least 2035. Furthermore, they should assess the impact of
during the engagement, formal board support could not be guaranteed.
changes in demand for commodities on the supply curve and develop
It was necessary to demonstrate the scale of long-term institutional
price implications before communicating the impact of the resulting
investor support by meeting the required thresholds for co-filing
scenarios qualitatively and quantitatively and describe their response to
required by company law.
the scenarios and the implications for strategy.
The shareholder resolutions we recommended our clients to co-file
One notable example has been the publication of climate change
asked for enhanced disclosure of the companies’ approach to climate
portfolio analysis by Anglo-Australian multinational mining company
change risks, including management of operational greenhouse
BHP Billiton in 2015. It set a welcome precedent in transparency by a
emissions, their strategic portfolio resilience to low-carbon scenarios,
12
Hermes EOS
research and development into low-carbon solutions, their public policy
While acknowledging that fatalities are difficult to eliminate, in our
position on climate change, as well as their overarching corporate
engagements we have pushed for effective and culturally sensitive
governance framework and link to key performance indicators.
health and safety training and that systems and procedures are in place
across all operations globally and audited and updated regularly. In
Support
general, we have seen health and safety standards improve across the
In the end, we successfully met the required thresholds by bringing
sector, reflected in, for example, lower lost time injury frequency rates.
together over 100 supportive institutional investors for the shareholder
proposal submitted at Rio Tinto and 50 for the resolution at Jersey-
Good governance
based Glencore. We eventually also managed to pass the required 5%
We also continue to engage with mining companies on good
alternative threshold for the shareholder proposal at Anglo American. In
governance. In the wake of the Bento Rodrigues dam disaster in Brazil
total, investors responsible for more than $8 trillion, including clients of
in November 2015, where a dam burst as a result of mining operations
Hermes EOS, were involved in filing the resolutions.
by Samarco, a joint venture between BHP Billiton and Brazilian mining
company Vale, we have stepped up our engagement efforts on the
At the AGMs of the respective companies, the shareholder proposals
governance of joint venture-operated mines. Above all, we want
received overwhelming support, namely 99% at Glencore, 98% at Rio
to make sure that lessons are learned and applied to future mining
Tinto and 96% at Anglo-American.
operations across the industry.
Anglo American committed to finalising energy efficiency targets at
So while the activities of mining companies naturally have an impact
its AGM, following the restructuring of the business. It also agreed to
on the environment, locally and globally, as well as on communities
carry out further analysis of the resilience of its principal commodities
living or working near mines, in our engagement we have pressed
to low-carbon scenarios, as well as to explore the link between
for better environmental, social and governance standards in their
remuneration and climate change-related key performance indicators.
operations. We are pleased about the steps the mining companies have
taken on climate change, for which we have helped pave the way, and
Rio Tinto meanwhile promised to work with institutional investors to
will continue our engagements in that and other areas.
explore new ways of analysing climate change risks.
For further information, please contact:
With the shareholder resolutions all passed, we are now working with
the companies to help define the nature of the additional disclosure
required to meet the requirements of the shareholder resolutions,
which ideally should be part of the strategy section of their annual
reports, and give feedback on first drafts. Glencore has already
published its view of the robustness of its business to low-carbon
scenarios and committed to conducting this analysis on the basis of
a 2°C scenario, which is particularly important given the company’s
Bruce Duguid
relatively high exposure to thermal coal.
xxxxx.xxxxxx@xxxxxxxxxxxxxxxxx.xxx
Public policy work
As part of our engagement, we collaborated with the Institutional
Investors Group on Climate Change (IIGCC) to produce the document
called Investor Expectations of Mining Companies – Digging deeper
into carbon asset risk5 which outlines the approach and disclosure that
investors expect of mining companies concerning climate change risks.
We are also working with the Task Force on Climate-related Financial
Disclosures, set up by the chair of the Financial Stability Board, to
establish guidelines for standardised risk disclosures by companies on
climate change. This will help to increase the scope of reporting across
more companies, as well as its comparability. It should also mean that
we do not have to use the administratively cumbersome approach of
using more shareholder resolutions to achieve the disclosure required
by investors across the industry.
Social engagements
In addition to the focus on environmental issues over the last year,
we continue to engage on social issues. This has entailed ensuring
that during the cost-savings programmes introduced at many mining
businesses following the downturn in commodities, companies are not
cutting corners on health and safety, environmental protection and
investment in their social licence to operate. It includes programmes
on community relations, as tension with local communities can lead to
significant reputational, operational and financial risks.
5 http://www.iigcc.org/files/publication-files/IIGCC_2015_Mining_Report_FINAL_WEB.PDF
www.hermes-investment.com | 13
Public Engagement Report: Q2 2016
Engagement on strategy
Overview
Many of our most successful
We adopt a holistic approach to engagement, combining
discussions on business strategy and risk management, including
engagements include discussions social, environmental and ethical risks, with structural governance
issues. We challenge and support corporate management in
Strategy
on business strategy and
their approach to the long-term future of the businesses they
run, often when there is minimal outside pressure for change.
structural governance issues.
We are generally most successful when we engage from a
business perspective and present environmental, social and
governance issues as risks to the company’s strategic positioning.
Companies may benefit from new perspectives on the board
and from promoting fresh thinking at the head of the company.
An independent chair or change of CEO is frequently the key
to improving performance and creating long-term value for
shareholders.
Examples of recent engagements
Cyber security
Board nomination process
Lead engager: Dominic Burke
A European company has made significant advances since our
Lead engager: Jaime Gornsztejn
first conversation on data and cyber security in 2015, recognising
In a meeting at the head office of an emerging markets company,
the significant shift in emphasis from traditional sources of
we were encouraged by the positive development in the board
communications revenue to data and that its management of
nomination process. We commended the company for disclosing
security concerns will be key to its future success. The company
the board nominees for the first time in advance of its 2016 AGM
has appointed chief data and security officers with backgrounds
and challenged its board composition and evolution, in line with our
in military intelligence and cyber security who, as members of the
engagement objectives. Although three new independent directors
executive committees, report to the chair/CEO. We discussed the
have joined the board over the last three years, it still comprises three
need to ensure non-executive directors develop sufficient knowledge
independent directors with tenures exceeding 20 years. The company
to effectively challenge and oversee management in these areas. The
sought to reassure us that it has formal procedures in place to verify
company welcomed our suggestion that an independent director sit
the independence of these directors, consistent with the country’s
on the security committee with management. It also acknowledged
regulations, which does not set a limit on tenure. We shared with
the importance of planning for effective communication of cyber
the company best practice in board evaluation and discussed the
incidents with stakeholders as part of its incident response plan and
possible benefits to the group’s effectiveness in discharging its duties
explained that effective communication with clients on data matters is
resulting from such an assessment. The company was receptive to our
a priority during product and service development. We also challenged
engagement and we agreed to follow up with the board secretary. In
the company on its management of cyber security risk arising from
a separate meeting, we were pleased to learn that the company has
its more than 12,000 suppliers and were reassured that additional
begun preparations to produce its first integrated report in 2017.
security measures are contractually required from the small number
of critical suppliers that have privileged access to the company’s data
Climate change risk management
and systems. On the related matter of protecting the human rights
Lead engager: Natacha Dimitrijevic
of customers when handling government data requests, the company
We spoke at the AGM of an oil major on behalf of our clients and
was able to illustrate a clear legal process and from next year will publish
10 other institutional investors who together have assets under
a transparency report detailing the number of requests it receives by
management of over $3 trillion. Following our intensive engagement
operating markets, something we have pushed for in line with many of its
with the company, which led to the publication of its climate change
peers. The company also offered us a visit to its cyber security business.
report at the shareholder meeting, we highlighted publicly the work it
has undertaken on climate change to date and the quality of dialogue
Proxy access
we have had with the company over the past year. We also outlined
Lead engager: Darren Brady
the remaining challenges on strategy, reporting and lobbying. In line
Through discussions with several senior representatives, we advanced
with our constructive engagement, we had informed the company
our engagements with a US company seeking a robust proxy access
in advance of our intervention. The chair welcomed our approach
right for long-term shareholders and a strengthening of the pay-
and input in his main speech and in his response to our questions.
for-performance relationship within executive compensation plans.
Positively, he announced enhanced transparency on lobbying practices.
Following intensive consultation with the company on how it should
In a subsequent meeting with the chair, we gained reassurance that
structure its proxy access policy over the past few months, we were
the company is committed to addressing the risk of climate change
pleased to learn that it has implemented our suggestions and approved
by including renewables in its energy mix, allocating the appropriate
a proxy access policy in line with our best practices guidance. While
capital and research and development expenditure.
there are a few deviations made by the company that are appropriate
to its individual circumstances, the resulting proxy access right is a
meaningful enhancement to shareholder rights. We commended the
company for its earnest engagement efforts and uptake of investor
14
Hermes EOS
feedback. We also challenged it on its executive remuneration practices.
issues at its AGM. We requested a further meeting to discuss board
While we do not have major concerns with its pay practices, we have
leadership arrangements and the company’s governance of political
been pushing for a higher percentage of long-term awards to be based
and lobbying donations, noting that we had voted by exception against
on objective performance criteria to strengthen the alignment of
the shareholder proposals on these issues. The board had discussed its
interests between executives and shareholders. The company informed
governance of political and lobbying donations and while we believe
us that from next year it will base at least 60% of its long-term awards
that it has reasonable approaches in place, its disclosures could be
on disclosed performance goals and enhance the transparency on how
improved. We subsequently participated in a survey organised by a
these targets are determined. We will continue to engage on this issue
consultant to the company in which we called on the company to
as it implements these enhancements. Furthermore, we questioned
focus on the issues that we see as most material to it, such as data
the company’s attempts to promote gender pay equality among its
protection, privacy and safe use of the internet and technology,
staff and learned of significant efforts already underway. This gave us
reduction in its own environmental footprint and helping its customers
more than ample comfort to support management by not backing a
with theirs, as well as human and labour rights within its own
shareholder proposal on this topic, as the company is already able to
operations and supply chain.
demonstrate robust action in this area.
Sustainability targets
Lead engager: Tim Goodman
The suggestions we made two years ago for a North American
company to report on mid-term and long-term sustainability targets
have directly influenced its sustainability programme and latest
reporting, according to its sustainability head. This has in turn enabled
us to progress our sustainability objective. Positively, two more of the
company’s longstanding directors are to step down in the next few
months in line with what we have called for in our engagement on
board composition. The general counsel provided a detailed account of
how governance at the company functions, how the lead independent
director is performing and how the committee chairs work together.
He also described the company’s processes for controlling its political
and lobbying activity in light of two shareholder proposals on these
Engagements on strategy and/or governance
United Kingdom
21 6
Developed Asia
North America
Europe
20 11
30 15
20 7
Emerging and
Frontier Markets
23 8
Companies engaged on
strategic and/or governance
objectives this quarter: 114
0 0
Companies with progress
Australia and
on engagements on strategic
New Zealand
and/or governance objectives
this quarter: 47
www.hermes-investment.com | 15
Public Engagement Report: Q2 2016
Public policy and best practice
Overview
We actively participate in debates on public policy matters to
protect and enhance value for our clients by improving shareholder
Hermes EOS contributes to
rights and boosting protection for minority shareholders. This work
olicy
extends across company law, which in many markets sets a basic
the development of policy and
foundation for shareholder rights, securities laws, which frame
Public P
the operation of the markets and ensure that value creation is
best practice on corporate
reflected in value for shareholders, and developing codes of best
practice for governance, management of key risks and disclosure.
governance, sustainability and
In addition to this work on a country-specific basis, we address
regulations with a global remit. Investment institutions are
shareholder rights to protect and typically absent from public policy debates even though they can
enhance the value of its clients’
have a profound impact on shareholder value. Hermes EOS seeks
to fill this gap. By playing a full role in shaping these standards
shareholdings over the longer
we can ensure that they work in the interests of shareholders
instead of being moulded to the narrow interests of other market
term.
participants – particularly companies, lawyers and accounting
firms, which tend to be more active than investors in these
debates – whose interests may be markedly different.
Highlights
the view that the high-profile breach at TalkTalk in 2015 marked a sea
change in the way their organisations deal with the issue, which is now
Climate deal signing ceremony
recognised as a principal risk and matter for board-level oversight.
Lead engager: Tim Goodman
Directors were concerned about the appropriate level of disclosure
We were honoured to be invited to the signing ceremony of the 2015
on cyber risk. We suggested that an appropriate starting point would
Paris climate change agreement at the UN building in New York. It is
be confirmation that a documented cyber security strategy has been
a testament to the commitment of our clients and the work that we
signed off by the board, covering critical assets and access, clear senior
have done and continue to do in fighting the risks to the value of their
level accountability, appraisal of supply chain risk, as well as investment
portfolios from climate change that we were part of the small non-
in technical capabilities and culture awareness.
state delegation invited to witness the beginning of the agreement
being put into formal legal effect. We intend to continue working
Executive pay
vigorously to ensure that the agreement marks a significant milestone
Lead engager: Bruce Duguid
in the successful fight to limit climate change to 2°C. The fact that
We hosted a special meeting of the UK Corporate Governance Forum,
nation states and other actors are taking brave steps now, without
which comprises corporate governance representatives of leading
waiting for a perfect solution to solve climate change, was evidence of
UK-based asset managers, to discuss potential new approaches to
the historic day.
executive pay. The discussion was based on the interim proposals
of the Investment Association’s working group on remuneration. In
Cyber risk
relation to the new structures for remuneration proposed in the paper,
Lead engager: Dominic Burke
many asset managers now support simplification, together with more
In the latest of our series of dinners with non-executive directors and
reliance on higher long-term executive shareholding requirements to
clients, we discussed cyber risk with representatives from banking,
ensure alignment of interests. Support is growing for a structure that is
pharmaceuticals and defence among other sectors. Board members
based on a one-year bonus scheme with a significant proportion of the
said that while cyber security is distinctive due to the maliciousness
bonus being withheld for a number of years in the form of shares. There
of the threat, they, as well as investors, should not be overwhelmed
was appetite to also explore the granting of shares to executives either
by the technical nature of the topic. As well as assigning responsibility
together with a moderated bonus scheme or even as an alternative to
to senior executives, including chief information security officers,
bonuses.
some companies have convened advisory committees of experts
which can help boards evaluate and understand mitigation efforts.
Proxy advisory legislation
It was clear that collaboration within and across sectors is critical to
Lead engager: Tim Goodman
developing best practice defences and that certain industries have
We co-signed a letter from the Council of Institutional Investors (CII)
benefited from government input, which others might learn from. As
addressed to the US Congress committee on financial services opposing
part of their preparation for incidents, companies must also consider a
proposed legislation which would constrain significantly the ability
communications strategy, including identifying a suitable spokesperson
of proxy advisory firms to act on behalf of their clients in the US. The
who can articulate technical and business dimensions to stakeholders.
legislation, if passed, would likely have a powerful knock-on effect
We will adopt many of the key points in our engagements on cyber risk.
elsewhere in the world because of the size of the US capital market. To
add heft to the letter, we encouraged our clients to sign the letter as
We were also the sole investor representative at a roundtable meeting
well and the CII was grateful for our efforts to do so.
of audit committee chairs to discuss cyber security. Participants shared
16
Hermes EOS
Other work in this quarter included
and regulators. The outcome of the project seems well suited to
Promoting best practice
provide at least a common starting point for dialogue between the
key players. We are pleased to have made a contribution to this
We spoke with a representative of the Access to Nutrition Index
which assesses and ranks the world’s largest food and beverage
important project.
manufacturers on their nutrition-related commitments, practices
In our consultation response to the Task Force on Climate-related
and performance globally. Following the launch of the 2016 Index,
Financial Disclosures, we explained that disclosure should seek to
we expressed an interest in joining a collaborative initiative to push
improve the understanding of climate risks. This means publishing
companies to take account of nutrition in their product formulation,
the risks arising as the economy moves to lower carbon, together
pricing and distribution, as well as to encourage responsible
with the physical risk of climate change, as well as the low-carbon
marketing and labelling.
alignment, in other words the progress made and future plans to
align value-creation with building a lower-carbon economy. We
At the quarterly Aiming for A members meeting, our contribution
to help coordinate the mining sector climate change resolutions and
advocated companies use the Aiming for A framework which we
lead the engagement at oil and gas majors was acknowledged by
have supported in our engagement with oil and gas and mining firms,
other members. Work is now underway to expand the Aiming for A
including the results of a stress-test of the value and performance
coalition to some larger asset owners and managers in continental
of each materially exposed investment to a range of climate change
Europe. We seek to explore the potential for supportive but
scenarios. We also advocated voluntary reporting by including
stretching resolutions at utilities and automotive players to reduce
investment intermediaries, such as asset managers reporting to their
long-term risks and enhance the alignment with the move towards
clients and, ultimately investors reporting to beneficiaries.
building a low-carbon economy.
We welcomed the idea by the Tokyo Stock Exchange to
develop an online engagement platform for listed companies
We participated in the launch of the Corporate Human Rights
Benchmark which will rank the top 500 companies globally on
and shareholders and made suggestions for it to be beneficial for
the basis of their human rights risk management and disclosure.
investors. As the current plan is to make participation voluntary, we
This complements a number of other initiatives seeking to drive
expressed concerns that the platform might be of limited use to
transparency and better performance on social issues, such as the
investors should only a small number of companies participate and
Modern Slavery Act in the UK, the UN Guiding Principles Reporting
encouraged the exchange to promote the benefits of the system to
Framework and the EU non-financial reporting directive.
attract many joiners. We also highlighted the importance of gaining
the full support from Japan’s Financial Services Agency.
At the UK launch of the next phase of the ESG integration initiative
as part of the fiduciary duty project by the Principles for Responsible
Public policy
Investment and UNEP Finance Initiative, we promoted the role
We lent our support to a bill being introduced in the US Congress
effective stewardship can play in asset owners – and asset managers
that takes aim at the lack of transparency in relation to corporate
as their agents – discharging their fiduciary responsibilities. We
ownership in the US. This includes convoluted ownership structures,
recognised the resource constraints of smaller funds in carrying out
opaque reporting and complex transactions, which can compromise
stewardship and explored different solutions, including industry
good governance and raise red flags for investors. The bipartisan
consolidation, outsourcing of stewardship activities and participation
Incorporation Transparency and Law Enforcement Assistance Act
in investor fora such as the UK’s Investor Forum.
would require US companies, with some exemptions, to disclose
the individuals who own or control the businesses they incorporate
We were one of the few investor representatives to participate in
and to keep that information up to date. Currently, in all 50 states
the EU Roadmap to Business and Human Rights Conference.
companies can be created anonymously, effectively removing
We encouraged companies to adopt the UN Guiding Principles on
personal responsibility and accountability from the corporate
Business and Human Rights Reporting Framework, the development
equation.
of which we have supported, in order to effectively communicate
how they manage human rights impacts.
We co-signed the investor statement on climate change supporting
the announcement by the US and Canadian governments to
We had an initial meeting with the CEO and a senior researcher
work together to reduce methane emissions in the oil and gas
of the High Pay Centre, a not-for-profit research and lobbying
industry by 40-45% in the next decade. Target-setting like this is an
association. We discussed some of the trends in executive
important public policy initiative to tackle fugitive methane leaking
remuneration, such as increasing CEO packages and an ever-
into the atmosphere.
widening pay gap, and their underlying reasons. We then focused
on some of the potential solutions and the role of key stakeholders,
We met the CEO of Stewardship Asia, the local think tank owned by
such as investors and employees.
one of the local sovereign wealth funds leading the development of
stewardship principles in Singapore. A final draft of the principles
We took part in a multi-stakeholder roundtable regarding the
was completed in 2015 by a working group, of which we are a
payment of living wages in global supply chains. There was
member. However, the planned launch for the first quarter this year
consensus that progress in this area has been slow and we expressed
has been pushed back as the principles are under review by local
interest in a collaborative initiative with other investors to address
regulators and major asset owners. We offered our support in the
the challenges at an industry level.
conversations taking place but it seems that any remaining issues
We participated in a call with Malaysia’s Institutional Investor
need to be resolved locally. A launch is still likely this year.
Council and provided final input into its main project for 2016, a
practical corporate governance toolkit for companies, investors
www.hermes-investment.com | 17
Hermes EOS makes voting recommendations at general meetings
wherever practicable. We take a graduated approach and base
our recommendations on annual report disclosures, discussion
with the company and independent analyses. At larger companies
and those where clients have significant interest, we seek to have
dialogue before recommending a vote against or abstention on
any resolution.
In most cases of a vote against at a company in which our clients
have a significant holding or interest, we follow up with a letter
explaining our clients’ concerns. We maintain records of voting
and contact with companies, and we include the company in our
main engagement programme, if we believe further intervention
is merited.
Hermes EOS makes voting
recommendations at
companies all over the
world, wherever its clients
own shares.
Hermes EOS
Overview
Over the last quarter we made voting recommendations
at 6,006 meetings (69,056 resolutions). At 3,127 of those
meetings, we recommended opposing one or more resolutions.
We recommended voting with management by exception at
35 meetings and abstaining at 24 meetings. We supported
management on all resolutions at the remaining 2,820 meetings.
Global
We made voting recommendations at 6,006
meetings (69,056 resolutions) over the last quarter.
Total meetings in favour 47.0%
Meetings against (or against AND abstain) 52.1%
Meetings abstained 0.4%
Meetings with management by exception 0.6%
Australia and New Zealand
Developed Asia
Emerging and Frontier Markets
We made voting recommendations at 47 meetings
We made voting recommendations at 1,019
We made voting recommendations at 1,134
(220 resolutions) over the last quarter.
meetings (11,940 resolutions) over the last quarter.
meetings (11,618 resolutions) over the last quarter.
Total meetings in favour 74.5%
Total meetings in favour 29.7%
Total meetings in favour 45.4%
Meetings against (or against AND abstain) 25.5%
Meetings against (or against AND abstain) 68.8%
Meetings against (or against AND abstain) 54.5%
Meetings abstained 0.3%
Meetings with management by exception 0.1%
Meetings with management by exception 1.2%
Europe
North America
United Kingdom
We made voting recommendations at 908 meetings
We made voting recommendations at 2,450
We made voting recommendations at 448 meetings
(13,507 resolutions) over the last quarter.
meetings (25,209 resolutions) over the last quarter.
(6,562 resolutions) over the last quarter.
Total meetings in favour 35.8%
Total meetings in favour 56.1%
Total meetings in favour 59.8%
Meetings against (or against AND abstain) 63.3%
Meetings against (or against AND abstain) 43.0%
Meetings against (or against AND abstain) 37.3%
Meetings abstained 0.7%
Meetings abstained 0.2%
Meetings abstained 2.2%
Meetings with management by exception 0.2%
Meetings with management by exception 0.7%
Meetings with management by exception 0.7%
www.hermes-investment.com | 19
Public Engagement Report: Q2 2016
The issues on which we recommended voted against management or abstaining on resolutions are shown below.
Global
We recommended voting against or abstaining on
7,889 resolutions over the last quarter.
Board structure 38.9%
Remuneration 21.8%
Shareholder resolution 7.8%
Capital structure and dividends 14.6%
Amend articles 2.0%
Audit and accounts 6.8%
Governance 3.0%
Poison pill/Anti-takeover device 0.9%
Other 4.2%
Australia and New Zealand
Developed Asia
Emerging and Frontier Markets
We recommended voting against or abstaining on
We recommended voting against or abstaining on
We recommended voting against or abstaining on
20 resolutions over the last quarter.
1,651 resolutions over the last quarter.
1,650 resolutions over the last quarter.
Remuneration 95.0%
Board structure 52.3%
Board structure 46.1%
Amend articles 5.0%
Remuneration 10.4%
Remuneration 10.5%
Shareholder resolution 1.5%
Shareholder resolution 4.5%
Capital structure and dividends 11.3%
Capital structure and dividends 10.4%
Amend articles 1.5%
Amend articles 2.7%
Audit and accounts 19.6%
Audit and accounts 4.5%
Poison pill/Anti-takeover device 3.3%
Governance 10.7%
Other 0.2%
Investment/M&A 0.1%
Poison pill/Anti-takeover device 0.1%
Other 10.4%
Europe
North America
United Kingdom
We recommended voting against or abstaining on
We recommended voting against or abstaining on
We recommended voting against or abstaining on
2,089 resolutions over the last quarter.
2,197 resolutions over the last quarter.
282 resolutions over the last quarter.
Board structure 27.9%
Board structure 34.9%
Board structure 34.4%
Remuneration 33.8%
Remuneration 22.9%
Remuneration 51.4%
Shareholder resolution 4.8%
Shareholder resolution 18.8%
Shareholder resolution 0.7%
Capital structure and dividends 17.5%
Capital structure and dividends 18.6%
Capital structure and dividends 8.2%
Amend articles 2.9%
Amend articles 1.0%
Amend articles 1.1%
Audit and accounts 5.5%
Audit and accounts 0.6%
Audit and accounts 2.5%
Governance 1.5%
Governance 1.2%
Governance 0.4%
Poison pill/Anti-takeover device 0.4%
Poison pill/Anti-takeover device 0.1%
Poison pill/Anti-takeover device 1.4%
Other 5.7%
Other 1.7%
20
Public Engagement Report: Q2 2016
This communication is directed at professional recipients only.
The activities referred to in this document are not regulated activities
under the Financial Services and Markets Act. This document is for
information purposes only. It pays no regard to any specific investment
objectives, financial situation or particular needs of any specific
recipient. Hermes Equity Ownership Services Limited (HEOS) does not
provide investment advice and no action should be taken or omitted to
be taken in reliance upon information in this document. Any opinions
expressed may change.
This document may include a list of HEOS clients. Please note that
inclusion on this list should not be construed as an endorsement of
HEOS’ services. HEOS has its registered office at Lloyds Chambers,
1 Portsoken Street, London, E1 8HZ.
Hermes EOS enables institutional shareholders around the world to
meet their fiduciary responsibilities and become active owners of public
companies. Hermes EOS is based on the premise that companies with
informed and involved shareholders are more likely to achieve superior
long-term performance than those without.
20160728PR