Corporate Governance Principles

Transcription

1 Excellence. Responsibility. Innovation. Principles, January 2016 Hermes EOS Corporate Governance Principles France For professional investors only

2 Principles, January 2016 Introduction We generally endorse the Corporate Governance Code of Listed Companies (the Code) set out by the Association Française des Entreprises Privées (AFEP) and Mouvement des Entreprises de France (MEDEF), 1 updated in November We also support the related recommendations issued annually by the High Committee of Corporate Governance set up in 2013 to oversee the implementation of the Code. In addition, we endorse the Recommendations on Corporate Governance issued by French Asset Management Association AFG, updated in January We encourage companies to either comply with the Code or explain their reasons for non-compliance. However, the guidelines set by the Code do not sufficiently cover all the issues we regard as important. In our French Principles, we therefore adddress additional issues, emphasise certain points and set out our preferred approach for particular matters. This document is intended to assist French companies and their directors in understanding our views on these issues. Smaller quoted companies We believe that the MiddleNext 3 guidelines provide useful advice to small and midcap companies on how to establish and develop their governance structure in a manner appropriate to their stage of development. The emphasis should be on good disclosure, a minimum level of independence on the board and a balanced approach guaranteeing the management of conflicts of interest. We also encourage companies referring to the MiddleNext guidelines to provide explanations on how the duties of their audit committee are carried out. Amplification of French corporate governance guidance Shareholder rights Voting right distortions French law allows companies to grant some shares multiple voting rights or to limit the voting rights of shareholders to a certain percentage of the share capital, thus potentially disregarding shareholders actual economic interests. We strongly support the principle of one-share one-vote, which ensures proportionality between equity ownership and voting powers, and thus economic risk bearing. As a general rule, we believe equal voting rights should be attached to shares regardless of the total holding or other characteristics of an investor. Divergence from the one-share one-vote principle is undesirable. Similarly we do not support enhanced dividends for long-term shareholders because these practices disadvantage some shareholders, increase investment risk and may reduce management accountability. Despite historical practice or the Florange law of 29 March 2014 advocating the above, we encourage French companies to remove them. Anti-takeover devices We are critical of anti-takeover devices that allow a company to take action that may prevent or unduly delay a takeover without shareholder approval because it should be the shareholders that decide on the merits of a bid. We therefore generally oppose the issuance of warrants or share buyback, as outlined by the law of 31 March 2006, that are permitted during a takeover period. According to the Florange law, boards do not need to have prior approval from the general meeting of shareholders, before implementing measures that may frustrate a bid. However, we believe that these decisions are best left to shareholders. We therefore press companies to explicitly exclude from financial requests the use of these practices during a takeover. We also encourage companies to introduce the principle of board neutrality in their by-laws. Pre-emption rights Pre-emption rights are an important safeguard for shareholders and their interests as part-owners of companies and we will carefully consider whether to waive them on a case-by-case basis. For the French market, we generally endorse AFG s recommendations of a 50% limit for capital requests with pre-emption rights, 10% without and 20% without pre-emption rights but with a priority period of at least five days. We expect an explanation for any capital increase that exceeds these recommendations. Provision of Information The provision of information is a pre-requisite for the intelligent exercise of shareholder voting rights. Timely publication is of particular importance for institutional investors who vote by proxy several weeks before the date of the general meeting. We also encourage companies to complement the legal proxy material with a report that includes key elements of information to assist shareholders in making better informed decisions. Finally, we strongly urge companies to publish the detailed results of the votes at the general meeting on their website. Related party transactions We expect enhanced disclosure on the nature of related party transactions, especially when the auditor report on related party transactions does not provide the level of information necessary to understand their motivation and scope. Significant transactions should be voted upon in separate resolutions. Board of directors We place a strong emphasis on overall balance and diversity in the composition of a board. The board should be made up of members with an appropriate and diverse range of competencies, backgrounds, knowledge and experience to enable it to effectively discharge its duties and responsibilities. These include leadership skills to move the company forward, expertise to make decisions, independence to hold executive management to account and international experience to reflect the company s footprint. We do not support the presence of non-voting directors (censeurs) on the board. In our experience, their nomination is often a way to by-pass good governance rules. Independence While representation of significant shareholders on the board can be justified and useful, we expect there to be a strong core of independent directors to ensure that the interests of minority shareholders are protected, to exercise objective judgment and, if necessary, to act as agents for change. We strongly recommend that at least half of the directors on the board, including from those representing significant shareholders, be independent in companies with a dispersed ownership structure, and at least one third of the directors in controlled companies. We encourage a carefully considered explanation in circumstances where the board composition does not meet these requirements and the Code s definition of independence. 1 Available at: 2 Available at: 3 Available at: 2

3 Hermes EOS Companies should provide a biography of all directors, including their area of expertise and clearly state whom they consider to be independent. In line with guidance published by the French Market Authority (AMF) in November 2015, we press for enhanced disclosure of the links of directors with the company, especially with regard to business involvements, in order for shareholders to assess their materiality. Companies should describe precisely how conflicts of interests are managed. We believe that employee representatives should count against the quorum of independent directors. We encourage transparency regarding the selection process of nominated employees and employee-shareholders on the board. Multiple and cross-directorships We are not supportive of unjustified cross-directorships. A director needs to dedicate time to the company to appropriately fulfil his duties. We expect an explanation when a director holds more than four other directorships in listed corporations not affiliated with the group, including foreign corporations, or when a director with executive responsibilities holds more more than one other directorship or is already chairing a board or an audit committee. A director should consult the board before accepting an additional mandate. Appointment periods We strongly believe that directors should be elected or re-elected on a regular basis to ensure that they feel appropriately accountable to shareholders. As such, while we recognise that the stability and continuity of the board are important, we normally encourage appointments of board members for periods of no more than two to three years. We will oppose any director up for election with a mandate greater than four years. Committees We welcome the recommendations of the Code on committees. In France, we generally encourage companies to ensure that all the members of the audit and at least a qualified majority of the remuneration and nomination committees are independent. All committees should be chaired by independent directors and have no executive members. When assessing candidates for the remuneration committee, we consider the criteria above, as well as the personal track record of directors, in their current capacity and beyond. We may question the appropriateness of the nomination of executives from other companies in this committee. For the audit committee, we pay close attention to the financial skills and experience of the members and their potential conflicts of interest. Chairing of the board Since the responsibilities and competencies of the chair of the board and the chief executive officer are different, we believe they are most effectively discharged by two different individuals. The separation of the roles ensures the focus of the chief executive on the management of the company, while a distinct chair introduces an additional element of overview and accountability. If the roles are combined in a company s specific circumstances, the reasons for it should be convincingly explained. In these situations, additional safeguards, such as the nomination of a lead independent director (administrateur referent) with the appropriate powers, are the minimum we require. An independent chair helps to ensure the CEO s accountability for managing the company in the interests of shareowners. To us, chairs are non-independent and executive when they receive a material compensation in exchange for their time-consuming commitment to the company. We also question the granting of variable compensation to the chair, as it can influence his or her oversight of the executive board. Lead independent director (administrateur referent) We promote the nomination of a lead independent director, particularly where the chair can be classed as non-independent or where the roles of chair and CEO are combined. The role and prerogatives of the lead independent director should be clearly defined in published rules of the board or article of associations. Among his or her key duties are leading the assessment of the performance of the chair and acting as a direct link to shareholders. Where the chair is nonindependent, he should be able to convene the board under certain circumstances. We call him or her to account for the management of conflicts of interest and compliance with good governance. Evaluation of the board We support greater transparency on the work of the board and the rules and procedures in place to facilitate its functioning. We welcome the recommendations in the Code regarding the evaluation of the board of directors. We believe that regular reviews of the performance of the board and its members are beneficial to companies as they help identify potential weaknesses so that they can be addressed before they cause problems. We therefore encourage companies to implement a formal process for these evaluations and to communicate on the areas identified for improvement. Remuneration Say on pay We welcome a vote on executive remuneration for performance during the past year as set out in the Code. The purpose of obtaining nonbinding approval of the remuneration from shareholders is to facilitate a dialogue between investors and the company on remuneration and to provide shareholders with an opportunity to formally express their opinion on the design and the implementation of the remuneration policy. We therefore urge companies to present this information in a coherent complete report with a narrative instead of merely publishing the table recommended by the Code and disclosing information in a referenced but scattered way throughout their regulated documentation. To assess the extent of pay for performance, investors require a clear and comprehensive disclosure of the remuneration policy and its implementation. We encourage stringent compliance with AFEP-Medef recommendations on share-based incentive schemes and strongly support related AFG recommendations. Furthermore, we emphasise the need for appropriate disclosure of performance criteria ex-ante, including a more specific definition of qualitative performance criteria, their link to the company s strategy and the rationale for the actual grant given regarding the performance ex-post. Long-term incentive schemes should be linked to sustained performance indicators and not vest before three years. Every year, the report should clearly state and explain for each pending plan the market value realised in comparison to the expected value awarded. 3

4 Principles, January 2016 Link between pay and performance Executive compensation continues to be an area of concern for Hermes EOS. While the legal requirements for specific features and disclosure have led to improved transparency regarding the link between pay and performance, experience shows that, in many cases, compensation still fails to align the interests of executives with those of long-term shareholders. In particular it often fails to safeguard against excessive risk-taking or be sufficiently reflective of long-term performance. We do not consider stock price appreciation on its own to be an appropriate performance metric. We expect long-term compensation plans to employ specific metrics, with rigorous targets, that are closely linked to a company s long-term strategy. This nexus should be clearly explained in the compensation discussion and analysis within the proxy document. Most variable compensation should be explicitly linked to these performance targets and not simply vest over time. Quantum should be capped. Our interest is not limited to executive level compensation. In particular, at organisations where staff pay makes up a high portion of the overall costs, we have concerns that levels of pay and performance criteria may create perverse and shortterm incentives for employees. We therefore encourage companies to improve their disclosure on how incentives for individuals with the ability to materially affect the performance of the business are linked to the interests of long-term shareholders, including the effective management of risk. We believe that non-executive directors should not receive variable compensation. Compensation principles We are concerned that executive compensation structures around the world are not fit for purpose, neither serving long-term investors nor, in many cases, having a proper alignment with the core longterm objectives of companies. Therefore we continue to hold many discussions across the globe on reforming pay with compensation committee members, executives, human resource professionals, compensation consultants and other investors. We believe that the principles 4 that we developed with a number of pension funds to provide high-level guidance to companies about our expectations of their pay structures and practices should be taken into account by all compensation committees which need to explain how they fulfil each principle disclosed within the proxy statement. The Remuneration Principles for Building and Reinforcing Long-Term Business Success are: 1 Compensation committees should expect executive management to make a material long-term investment in shares of the businesses they manage. 2 Pay should be aligned to long-term success and the desired corporate culture throughout the organisation. 3 Pay schemes should be clear, understandable for both investors and executives, and ensure that executive rewards reflect long-term returns to shareholders. 4 Compensation committees should use the discretion afforded them by shareholders to ensure that awards properly reflect business performance. 5 Companies and investors should have regular discussions on strategy and long-term performance. The full version of the compensation principles along with a number of other policy documents on compensation and other topics which Hermes EOS has produced can be found on our website. 5 Other compensation We expect companies to disclose in a thorough manner actual or potential compensation received by their directors, including from other companies of the group, whether controlled or not. Directors should give up their employee contracts. When a company chooses not to not comply with this recommendation, we expect explanations and the disclosure of the full benefits related to an employee contract, including with other companies of the group. Departure packages should clearly state the circumstances and the performance criteria they are subject to in order not to leave room for interpretation or payment for failure. We do not support payment of unvested long term plans and additional transactional payments. In line with the AMF recommendations of November 2015, we encourage companies to publish the full extent of the remuneration received by an executive upon departure, explaining as well how it complies with the Code and the resolutions voted at a general meeting. Furthermore, we highlight that a departure package and non-compete clause cannot be cumulated with pension benefits, and in any case, the full package should not exceed two years, excluding multi-annual plans and exceptional remuneration. We encourage a clear presentation of the information related to additional pension arrangements. Following the Macron law of 6 August 2015, we stress that rights acquired under additional pension schemes should be based on the annual fixed remuneration and bonus, excluding share grants, multi-annual plans and exceptional remuneration. Environmental and social risk management Companies should manage effectively environmental and social factors that are relevant to their business, with a view to enhancing their sustainability. They also ought to regularly disclose to shareholders how they identify and manage these material risks and provide evidence that the processes to do so are effective. Furthermore, companies should clearly define board and senior management responsibilities for environmental and social issues. Directors of companies should be accountable to shareholders for the management of material environmental and social risks, as over the long term these will affect the value and ability of companies to do business. Therefore, we will seek to enter dialogue should we judge the management of, or reporting on, environmental and social issues to be insufficient. Climate change and human rights risk management are of increasing importance to our clients. The effect of climate change that is largely unabated either at individual company or portfolio level is likely to destroy much of the value of the portfolios of our clients. We therefore expect to see companies thoroughly prepare for a low-carbon economy and to mitigate the likely risks of climate change in their business model and operations, as well as seek opportunities from this transition. With this long-term perspective in mind, we expect companies to voluntarily embrace public policy initiatives required to make the transition. Licences to operate are increasingly affected by the reputation of companies, including their human rights performance. We support the UN Guiding Principles on Business and Human Rights and the UN Global Compact. We expect companies to adopt the International Integrated Reporting Framework 6 to disclose how they manage human rights issues that are material to their business

5 Excellence. Responsibility. Innovation. Hermes Investment Management Hermes Investment Management is focused on delivering superior, sustainable, risk-adjusted returns responsibly. Hermes aims to deliver long-term outperformance through active management. Our investment professionals manage equity, fixed income, real estate and alternative portfolios on behalf of a global clientele of institutions and wholesale investors. We are also one of the market leaders in responsible investment advisory services. Why Hermes EOS? Hermes EOS (HEOS) enables institutional shareholders around the world to meet their fiduciary responsibilities and become active owners of public companies. HEOS is based on the premise that companies with informed and involved shareholders are more likely to achieve superior long-term performance than those without. Our investment solutions include: Private markets International real estate, pooled funds, segregated mandates, UK commercial real estate, UK commercial real estate debt, UK private rental sector real estate, infrastructure and private equity High active share equities Asia, global emerging markets, Europe, global, and small and mid cap Specialist fixed income Absolute return credit, global high yield bonds and multi strategy credit Multi asset Multi asset inflation Responsible Investment Services Corporate engagement, intelligent voting and public policy engagement Offices London New York Singapore Contact information Hermes EOS Natacha Dimitrijevic +44 (0) natacha.dimitrijevic@hermes-investment.com Business Development United Kingdom +44 (0) Africa +44 (0) Asia Pacific Australia +44 (0) Canada +44 (0) Europe +44 (0) Middle East +44 (0) United States +44 (0) Enquiries marketing.mailbox@hermes-investment.com Disclaimer 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. 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 Hermes EOS Limited ( 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. CM154669/T3618 Global 01/16