CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT REPORT: EUROPE, THE MIDDLE EAST AND AFRICA

Transcription

1 CORPORATE GOVERNANCE & RESPONSIBLE INVESTMENT REPORT: EUROPE, THE MIDDLE EAST AND AFRICA

2 QUARTERLY REPORT SEPTEMBER 30, 2015 Table of Contents Engagement with Issuers and Statistics Voting Highlights and Statistics Active Ownership and Responsible Leadership Market Development and Trends

3 Engagement with Issuers¹ United Kingdom Engagement Statistics² Level of Engagement³ Topics Discussed Number of engagements Basic Moderate Extensive Environmental Social Governance EMEA ex United Kingdom Engagement Statistics² Number of engagements Basic Moderate Extensive Environmental Social Governance The following examples from the past quarter demonstrate the wide range of issues our engagements cover and highlight our efforts to protect the value of clients' assets invested in these and similarly situated issuers. The below examples reflect engagements that merited particular focus on environmental, social and governance ( ESG ) considerations. We aim to frame our engagements in the context of long-term value creation.. In the UK we engaged with a large consumer goods company. The company has faced substantial challenges in relation to their performance over the last two years that have manifested in a number of profit warnings. We met with the company s chairman to discuss (A) the current performance and (B) actions taken by the management and the board to address the key causes/issues contributing to the poor performance. We further highlighted our concerns over inadequate communications with the market at large. In our view, given the profit warnings and overall concerns in relation to performance, the company and its board should have been more intentional with their communications and outreach to investors. Finally we communicated our views and assessment of the executive remuneration and the need for a closer alignment between the performance of the company and its executive pay. After the results of the shareholder meeting, we conducted a follow up engagement with the Remuneration Committee Chairman and the Senior Independent Director. The board was seeking to better understand the position of the company s shareholders given the low level of support for the vote on remuneration. We stressed the importance of looking at remuneration not in isolation but, rather, in the perspective of the company s performance over the last few years. In this context, we discussed the company s strategy, management s execution and the board s track record in oversight. ¹ The companies referred to are for illustrative purposes only and not as a recommendation of any particular securities. ² The EMEA including the United Kingdom Statistic Report is a reflection of 3rd Quarter ³ Basic engagement is generally a single conversation on a routine matter; Moderate engagement is technically more complex and generally involves more than one meeting; Extensive engagement is technically complex, high profile and involves numerous meetings over a longer time frame. 3

4 2 3 4 We engaged with a UK mining company to discuss an increasingly challenging operating environment given the backdrop of falling commodity prices, their credit rating pressures and the capital raising activities. We were also looking to understand the nature of alleged human rights and environmental violations in some of the countries of operations. We discussed the structural concerns relating to some commodities that are impacting the whole sector, and the company s response to the associated challenges. The company explained their focus on the lower cost production and balancing the dynamics of supply and demand. An example given to illustrate these efforts is the temporary suspension of production of certain commodities across Africa. We will continue to engage with the company as they execute a number of changes in order to better meet ongoing challenges in the sector and look to manage and reduce their current high leverage. As part of our research into deforestation and loss of biodiversity as a result of land clearance in plantation-based agriculture, we engaged with the Head of Corporate Responsibility of a UK tobacco company. Our objective was to learn more about the company s position on deforestation given the direct link of its product to this issue. One important consideration is that the company directly owns farms which provide only five percent of tobacco leaves used. The remainder is sourced from suppliers, with two of whom provide approximately 75 percent of their global input. The company recognizes that the impact of deforestation is the primary sustainability risk to its business, and it also recognizes that this is a commercial risk. In order to actively address this, the company has a dedicated leaf sustainability team comprising international experts and agronomists. This team carries out the company s work to support its Social Responsibility in Tobacco Production (SRiTP) program, a performance management tool which enables the company to assess the adherence of its suppliers to the framework as well as their progress towards improving their standards. The leaf sustainability team also carries out farmer training and capacity building. Other components of the company s approach include a tree planting program in partnership with suppliers and annual targets within its general environment policy. As part of our research into deforestation and loss of biodiversity as a result of land clearance in plantation-based agriculture, we engaged with members of the Sustainability Operations team of a French apparel and accessories company. Our objective was to learn more about the company s position on deforestation as a result of the use of leather by its brands in the manufacturing of their products. Of great interest was the Environmental Profit and Loss Account (E P&L) tool developed by the company to help it identify the value of natural capital to its business and to help measure and understand the impact of its business on natural capital in a quantifiable and comparable way. Beyond the ambition to put a cost on the environmental footprint of its business, the data gathering and analysis required to establish the framework for the E P&L has provided the company with a finely detailed map of its brands supply chains and dependencies. The company has mapped five tiers of suppliers, the fifth and final being raw material production. In our view, this understanding puts the company ahead of many, if not all, other companies and better positions it to take smarter, more informed decisions on sourcing and costs. For context, it is not uncommon for companies to only assess the practices of their first tier, or at best second tier, of suppliers. This detailed and holistic mapping also enables the company to frame its sustainability objectives in a 4

5 real business context with actionable outputs from analysis, rather than abstract targets of, for example, reducing its carbon footprint by 20 percent. In the company s view, the E P&L has enabled it to make sustainability issues real. The company identifies leather as its largest impact raw material by sheer volume. It has therefore established a target of 100 percent responsible leather sourcing which it concedes is very ambitious. We also got the impression the company recognized that this target was rather vague in terms of how it would be measured. There is currently no target date to achieve this goal; however, the objective in setting the target was to try to move the business forward by outlining a goal. The company is tracking progress against this target but refrained from disclosing any details. It has found traceability to be the biggest roadblock in being able to confidently determine whether the leather is sustainably sourced. The required farm or slaughterhouse-level disclosure applies to the meat as opposed to the skin. As the meat represents 92 percent of the economic value of a cow, the company finds there is greater impact in collaborating with partners to have more influence. The company is a member of the Leather Working Group, a multi-stakeholder initiative which seeks to reduce the environmental footprint of the tanning industry. Tanneries that have received a gold rating are required to have traceability directly to the farm, thus providing an indirect method to ascertain the degree of sustainability. 5 This quarter, we undertook a series of engagements with issuers in the Italian energy, utilities and telecommunications sectors. The purpose of these meetings was to better understand the companies assessment of regulatory risk to their business, including whether the boards had identified this to be a material risk and how involved they then were in overseeing managements mitigation of the risk. Where relevant, we also examined political risk both domestically but also from overseas operations from the perspective of regulatory change. Within energy and utilities specifically, we sought to understand the impact of the expiration of the current domestic regulatory period for electricity distribution, the mid-term review of the current domestic regulatory period for gas distribution, any considerations stemming from the move towards an EU Energy Union and the impact of revisions to the EU Emissions Trading System. As expected, all companies identified regulation and regulatory change to have a crucial impact to their ability to do business. Oversight of regulatory risk is a key business risk. For many, the regulatory framework is a natural counterpart to their work, so developing and maintaining a robust relationship with regulatory bodies is an obvious task for the boards and management. Some companies have established dedicated departments to manage this relationship, while others have positioned their CEO as the key interlocutor. This ideal relationship was also defined differently across the group of companies. For some it meant forming a partnership for the exchange of information on technical developments, new ideas and indicators on how issues may evolve, for others it meant proactively contributing to shaping the framework to ensure fair play across the sector, and for others this meant consciously establishing a very clean, arm s length relationship that could never be called into question. BlackRock is comfortable with the structures the companies have developed to assess and address the impact of regulatory change. 5

6 One oil and gas company with whom we examined on the materiality of political risk in its overseas operations pointed to their history and how limited domestic opportunities meant that its growth resulted from management and the development of potential foreign opportunities. Assessment and mitigation of political risk is therefore a natural component of the company s strategy. The company views its differentiator as the ability to create a link with the host country. The company positions itself as a local producer and player, e.g., they do not differentiate their logo from local companies. The company does maintain its own ethical standards which are higher than local best practice. Another example of the company s commitment to the local community is its management of operations in conflict areas. The priority is, of course, employee safety; however, there is also an interest from all stakeholders to maintain a business as usual state. If the company is forced to shut down the business, the entire community would be out of luck. The company believes this principle builds credibility and that it would have none if it fled a city or region as soon as there was conflict. The telecommunications company with whom we engaged with over foreign political risk identified any one government s policy on privacy to be the main differential. The privacy laws in its foreign market are very similar to those in its domestic market. More broadly, policies in relation to infrastructure are crucial for the telecommunications sector. The company pointed out that within the mobile space, every provider is also an infrastructure player so the regulations relate to treatment of customers, privacy, and the formation of cartels, amongst others. The fixed line product, on the other hand, usually results in a monopoly or small oligopoly. Because the company is the sole domestic player and, importantly, there are no cable operators in the country, it transpires that the regulator regards them as truly significant in the market and therefore applies quite strict rules. This results in a very delicately balanced relationship with the regulator and, importantly, its peers as it is constantly working to avoid private regulation from its peers. 6 In regards to the outcome of the regulatory review period in Italy, it is perceived that the objective is to inject more stability to pricing. The expected result is greater transparency for the market at the next regulatory period. No significant change to business is foreseen from regulatory review. The energy and utilities companies we spoke with recognized the need to partner with the regulator for broader benefits beyond their immediate business. The EU Energy Union is also a positive development for these companies as the initiative seeks to provide a fullyintegrated internal energy market. This is beneficial as two of the four gas corridors identified by the EU to be the main distribution networks within Europe pass through Italy. The country is also well-positioned for future debottlenecking of the Iberian Peninsula. We had an introductory meeting with a Dutch insurance company. We provided an overview of our approach to corporate governance, and we probed the company s governance structure, specifically the role of the Supervisory Board in matters relating to strategy. We also discussed the company s view of the role of the proxy advisory industry, particularly in the framework of its shareholder base. In this context, we also discussed the importance of direct engagement between issuers and their investors on corporate governance matters, and how this has evolved across different markets. Finally, we shared our views on Supervisory Board 6

7 engagement with investors on corporate governance matters extending beyond executive remuneration, as we find this is a dialogue that Dutch issuers are beginning to explore. 7 8 BlackRock was invited to attend a sustainability roadshow with the CEO of a French oil & gas company. There were two main topics of discussions around the most material environmental and social risks the company is facing: climate change and health and safety. Regarding the latter, the company had an average of 11 fatalities per year which is a high number for the sector. The CEO emphasized that safety was a top priority for the company for three reasons: for the protection of the company s assets and people; as a sign of operational excellence; and because poor safety results could be seen as a sign of poor leadership. The company is also focused equally on reducing inefficiencies. We will keep engaging the company on that issue as we believe they should have a clearer strategy to remediate the situation. Regarding the question of climate change, the strategy of the company is developed around the following axes: The promotion of natural gas with a 50/50 split between oil and gas production; The investment of $500 million a year in renewable energy to expand in biofuels and solar; To exit from the coal business and coal trading; To improve energy efficiency (the company joined the World Bank initiative to eliminate gas flaring); To be proactive on carbon pricing; To invest in research and development. The company was a first mover on carbon capture and storage. The company created a fund to invest in start-ups creating new technologies as energy storage. We engaged with a Hungarian Oil and Gas group because its performance was weak over the number of recent years and BlackRock holds a substantial holding in the company. In addition, the company s CEO is implicated in the controversy concerning an acquisition in We engaged with the group to gain a better understanding of how the company governs itself and manages ESG risks. Our goal was to understand if a connection could be made between the poor performance and the way the company is managed from an ESG perspective. The company has an unusual governance structure whereby it has a tree-tier board (as opposed to the most commonly seen two-tier or one-tier structures in Hungary), comprising of a total of 24 individual directors between them. The roles of Chairman and CEO are combined and the C/CEO also sits on the remuneration committee. The executive remuneration arrangements are highly skewed towards short term performance indicators. The remuneration structure is very complex and the achievement of the performance metrics or the quantum earned are not disclosed retrospectively. The Hungarian government owns around 25% of the ordinary shares and has a significant influence over the company s direction. Additionally, the government is the owner of the B share, which gives them an ultimate veto power over certain proposals, e.g. dismissal of the member of Board of Directors. We established that the company is managing its E/S risks relatively well. The 7

8 group takes moderate steps to assess and address the impact of climate change regulation on their business. The company s focus on improving occupational H&S have to be commended. In summary, we believe that there is a level of unnecessary complexity around the board structure and the executive remuneration. The company should make more effort to establish governance structures that ensure transparency and equal treatment of shareholders. We will be communicating with the company in the future to establish if any progress has been made. 8

9 Voting Highlights EMEA Region Voting Statistics 4 Country Number of meetings voted Number of proposals % of meetings voted against one or more management recommendations % of proposals voted against management recommendation United Kingdom 184 2,575 14% 2% EMEA ex United Kingdom EMEA including United Kingdom Totals 256 2,306 31% 7% 440 4,881 25% 4% Highlighted in the following are several high profile shareholder meetings and/or engagements that particularly demonstrate our efforts to protect the long-term value of clients assets. 1 A South African healthcare and distribution company held an extraordinary general meeting to make adjustments to its Black Economic Empowerment (BEE) agreement. In order to redress historical inequalities, qualifying companies in South Africa are required to set up facilities to provide for economic privileges to previously disadvantaged groups within society. This policy is referred to as Black Economic Empowerment, and the prescribed tools include measures towards employment preference, skills development, ownership and management, to name a few. In this case, the company was proposing the early termination of its BEE agreement. The original termination was planned for The shares which had been allocated to the BEE facility, representing 1.5% of issued share capital, would be sold to the company s 36.2% shareholder at a price of ZAR We note that this shareholder previously launched a takeover offer at same price, which was not taken up by 22.4% of shareholders, thereby blocking the bid. A new BEE transaction will be launched after this deal is complete. The rationale for this rejigging is unclear. Equally unclear is which party is the ultimate beneficiary of these transactions and in whose interest they are being proposed. As such, we withheld support of the proposals. 4 The EMEA including the United Kingdom Voting Statistic Report is a reflection of 3rd Quarter 2015 and sourced from ISS Proxy Exchange on October 1,

10 We engaged with a Dutch telecommunications company in relation to proposed article amendments at its shareholder meeting. The company was seeking to enable the distribution of interim dividends from distributable reserves without first requiring separate shareholder approval at a general meeting. We clarified our understanding of the board s rationale for removing this shareholder protection. If shareholders considered that the board had paid out an excessive or imprudent interim dividend, they would still have the opportunity to approve or reject the total proposed dividend at annual general meeting. We also note that the company has historically always paid an interim dividend of one-third of the total dividends paid for that financial year. On this basis, we voted in support of the proposal. In the UK we met with the Chairman of a company which is a provider of a range of utility services to residential and small business customers in the United Kingdom ahead of their annual general meeting. The primary purpose of our engagement was to discuss the rationale for proposed changes to the remuneration policy, which would see the repricing of share options for certain individuals following the fall in the company s share price. We also discussed the board and key committee composition, which does not comply with recommendations under the UK Corporate Governance Code. It is worth noting that the Chairman is also the largest shareholder. We expressed concern about the proposed changes to the repricing of share options as we believe this does not align management with shareholder s. The Chairman explained that they would not normally re-price share options, and they have not done so historically, but believes the circumstances warranted the change. On balance we were unable to support management and voted against approval of the remuneration report. At a recent annual general meeting of a German company, which provides logistics and services to the pharmaceutical and healthcare services, we voted against a director election. The company has a large shareholder and three of the six shareholder-elected board members are affiliated with the controlling shareholder. The nominee was appointed to replace a director who resigned from the supervisory board in February Whilst we accept the presences of representatives of significant shareholders on the board and key committees, we believe the board and key committees would benefit from a more independent representation as the board and key committee independence levels falls below market practice. As such we voted against the nomination having taken the view that the nomination process does not fairly represent the interests of all shareholders. A French software company convened a special meeting last quarter to approve a new long term incentive plan. The company had decided to benefit from the new regulation called Loi Macron. The new law allows for the grant of restricted shares with a shorter vesting period while employers and employees could benefit from a more favorable tax regime. According to the terms of the proposal, restricted shares could have been granted with only a one-year vesting and one-year holding period. As we believe equity-based plans should align the interests of the managers and employees with shareholders interests over the long term, we decided to vote against this plan which was too short-term focused. 10

11 6 A French telecommunications company incorporated in Luxembourg asked its shareholders to approve a cross-border merger in order to reincorporate the company in the Netherlands. When BlackRock analyzes this type of proposal, we make sure we understand the rationale but also the consequences of reincorporation on shareholders rights. In this situation, we were concerned by multiple corporate governance features of the new Dutch company. Indeed, the creation of a dual-class share structure was planned in order for the controlling shareholder to keep its voting power while financing future acquisitions with shares. Moreover, the controlling shareholder would have the control of the board as he, or his children in his absence, would be granted as many votes as all other board members in aggregate. Finally the company would not be respecting several recommendations of the Dutch corporate governance code regarding the composition of the board. Taking into account all these elements, BlackRock voted against this proposal which seemed to mainly serve the controlling shareholder s interests while being detrimental to the minority shareholders rights. 11

12 Active Ownership and Responsible Leadership Speaking Events Members of CGRI EMEA team spoke at a number of events over the past quarter, with the objectives of furthering the public policy debate on matters deemed important to investors and/or promoting an increased understanding of BlackRock s approach to CGRI. We target events that enable us to connect with key stakeholders and thought leaders, including corporate directors, senior members of management teams, and other shareholders. Below is a list of select speaking events from the quarter, and subject matter covered: Georgeson Annual Conference Review of the 2015 Italian Proxy Season Rome, Italy BlackRock was a panelist in a session focused on Investors Participation and Activism at an annual conference in Rome hosted by Georgeson reviewing the trends and outcomes of the voting season in Italy. The conference was attended by a wide range of Italian issuers. We used this event as an opportunity to provide our view on the importance of engagement between non-executive directors and investors on corporate governance matters. Italy has historically been a market where corporate governance engagement is managed by Investor Relations or the Corporate Affairs team; however, we have witnessed an openness to engagement on such matters by a handful of Italian issuer boards. We consider willingness by boards to engage with their investors on corporate governance matters as an important indicator of board accountability. 12

13 Active Ownership and Responsible Leadership ESMA round table on Best Practice Principles for Providers of Shareholder Voting Research & Analysis Paris, France BlackRock attended a round table session organized by the European Securities and Markets Authority to review the impact to date of the Best Practice Principles for Providers of Shareholder Voting Research & Analysis. This is part of a continuing dialogue in the market on the role of proxy advisory firms in the voting of shareholder meetings. Being an active participant in this debate from the beginning, and we reiterated our position at this session which was attended by other global investors, issuers, regulatory bodies, industry bodies and proxy advisory firms. BlackRock regards proxy advisory firms to provide an important service for institutional investors. We believe that proxy advisory firms are accountable to their clients, who are investors, and that investors are in turn accountable to their own clients for thorough analysis including engaging directly with issuers on corporate governance matters. 4th Pan-European Investor Relations Conference Amsterdam BlackRock was a panel participant in a session focused on the role of proxy advisory agencies in issuer-investor dialogue at the 4 th Pan-European Investor Relations Conference. The event was hosted by a number of investor relations societies, and attended by a number of issuers from markets across Europe. BlackRock again used this opportunity to restate our position on the importance of the proxy advisory industry, the chain of accountability, and the importance to issuer engagement with their investors on corporate governance matters in order to enable holistic understanding and pragmatic analysis. Germany on Corporate Governance in Emerging Markets Leipzig, Germany BlackRock presented on Corporate Governance in Emerging Markets: How to gain the competition for investors? The theme of the conference centered on the evolution of corporate governance in emerging markets with the specific focus on the 2015 revision of the OECD Principles and the principles relevance for emerging markets investors. The conference participants debated the role of regulators in corporate governance in emerging markets, regulatory and policy environment that is seen as a critical factor for investor confidence and the governance expectations of key investor groups. Resource Efficiency and Fiduciary Duties of Investors Brussels, Belgium BlackRock participated in a stakeholder meeting organized by Ernst and Young ( EY ) on behalf of the European Commission ( EC ) on "Resource Efficiency and Fiduciary Duties of Investors". The aim of the session was to discuss and clarify the need for the integration of environmental and resource efficiency issues, as well as other environmental, social and governance (ESG) topics, into the fiduciary duties of investors in the European Union and its Member states. At the event, the study 13

14 Active Ownership and Responsible Leadership on resource efficiency and fiduciary duties was presented by EY. The study and the stakeholder meeting was an opportunity to discuss the preliminary findings and possible policy action for the EC to consider. Fostering Economic Growth in Europe: the Paris Offer, Paris Europlace Paris, France BlackRock participated in a panel discussion on the topic of "Better Understanding a Company's Performance: Can CSR Enhance Financial Communications". The panel presented, to an audience of 80 issuers, investors, consultants and media, on the topics of disclosure of ESG related information, ESG integration, integrated reporting and engagement. The panel was composed of an array of issuers and investors, which helped illustrate a variety of approaches. BlackRock stressed the importance for issuers and investors to think in an integrated manner and not to separate financial and extra-financial risks. Corporate Governance and Attraction of Investors Paris, France As the Institut Francais des Administrateurs (French Institute of Directors) was presenting to their members the update of their guide on French corporate governance practices, we were invited to share the views of a large international/global investor. We focused our discussions on the controversial topics in France: double voting rights, the removal of the principle of neutrality of the board during a takeover, and executive remuneration. We highlighted the fact that board members should engage more with their shareholders in order to get a better understanding of investors views and expectations. 14

15 Market Developments and Trends France Macron Act The recently enacted Loi Macron is intended to be a central piece of the socialist government s plan to boost the French economy. Among a multitude of measures, a couple of sections of the legislation are related to corporate governance and specifically remuneration. The Macron Act aims to make the use of performance shares plans more attractive to companies by reducing the minimum vesting period to one year instead of two years and reducing the tax rate for employers and employees. If the vesting period is reduced to a year, then there is a minimum holding period of one year as well. The new law applies only to plans approved by shareholders after August 8, French executives have traditionally received retraites supplémentaires, supplementary executive pension plans, once they retire. The government has decided to regulate these plans which have been perceived as excessive. It is worth noting these pension plans were already subject to the related-party transactions regime. From now on, the benefit of any supplementary executive pension plan by a director of a listed company will be dependent on the performance of the company. All executives pension plans will need to be approved by shareholders at the appointment or re-election of the beneficiary. The new regulation limits the number of external board memberships of an executive to two instead of four, thus integrating into the Code of Commerce the recommendation of the AFEP-MEDEF code of corporate governance. 15

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