Engagement Reporting

Emerging and Frontier Markets Go to Top

Hermes EOS was pleased with the proposed board refreshment by a financial services company in the emerging markets. The company is implementing the succession of its CEO, which has been well planned and communicated to the market. The CEO, who is also a member of one of the founding families, is moving to the board as non-executive co-chair. The proposed nominees to the 11-strong board also include a mix of family members, former executives and five independent directors, leaving Hermes EOS satisfied with the level of independence as the board exceeds the Hermes EOS requirement of one third. In a positive call with the head of investor relations, on behalf of PNO Media, Hermes EOS challenged the company on the alignment of its board composition with its strategy. Hermes EOS gained reassurance that new independent directors will bring diverse skills, such as retail and information technology, in addition to the extensive banking and finance skills already present in the group. Nevertheless, Hermes EOS pressed the company to implement regular external independent board assessments in line with best international practice. Although the company has a well-developed self-assessment process, Hermes EOS stated that an independent evaluation would benefit the board and give comfort to stakeholders that it is committed to improving its effectiveness and performing its fiduciary duties. This is particularly relevant in a company with a concentrated ownership structure and members of the controlling families sitting on the board. The head of investor relations was receptive to the engagement of Hermes EOS and asked for examples of best practice, which Hermes EOS shared with the company. Hermes EOS will follow up on independent board evaluation with the board secretary.

Hermes EOS was satisfied with the maturity of the compliance programme of another emerging markets company and challenged it to extend and adapt it to its subsidiaries and partnerships. In a positive meeting with its chief compliance officer, on behalf of PNO Media, Hermes EOS reviewed the progress of the company’s compliance programme, which had been launched as a response to a corruption crisis, but is now being embedded in corporate culture. The chief compliance officer described the due diligence on integrity that all suppliers, service providers and appointees to non-executive or senior executive position must be subject to. Hermes EOS was encouraged that the procedures are now part of the company’s articles of association, which makes political interference more difficult. Hermes EOS asked how the culture has been changing as a result of the compliance programme. The chief compliance officer presented a survey on employee perception of the programme, with 27,000 responses showing an increasing awareness of the code of conduct and the independently operated whistleblower line. Hermes EOS was pleased with the progress but challenged the company on how the compliance programme will be implemented at its subsidiaries, as historically it has had poor oversight over these. However, more recently, the articles of association of the subsidiaries were amended to establish stronger supervision by their parent. The chief compliance officer sought to reassure Hermes EOS that the compliance and culture change programmes are also being deployed at all subsidiaries, with the reported metrics consolidating data from all companies. Given that the company is increasingly partnering with peers to share risks and capital expenditures, Hermes EOS raised concerns about the compliance risks, mainly when the company is a minority partner and not in control of the operation. The chief compliance officer illustrated the priority given to compliance using the example of a partnership agreement with a peer company. Hermes EOS gained comfort from the progress of the compliance programme and encouraged the company to share the expertise and experience with its supply chain to improve integrity in the industry, which the chief compliance officer promised to consider.

On behalf of PNO Media, Hermes EOS provided the investor perspective on the environmental performance disclosure of companies at the CDP training seminar in Beijing, as part of its continuing collaboration with the initiative in China. The recommendations and connections with companies of Hermes EOS have supported the expansion of this training, as the number of attendees at this event has grown from two in 2016 to over 20 company representatives this year. Hermes EOS was pleased to see that companies, especially those from the energy, chemicals, consumer and financial services sectors, have increased their resources to improve the disclosure of their environmental performance and set objectives in line with global best practice. All of the company representatives gave positive feedback and committed to improving their environmental performance disclosure after the seminar. Hermes EOS provided case studies on how it uses ESG data, including peer and times series assessments. It also pointed out that in addition to senior or board commitments to disclosure, there needs to be vertical integration and alignment of disclosure responsibilities to ensure sustainability is embedded throughout the company. Furthermore, Hermes EOS highlighted the importance of participation in policy discussions to shape the environment in which the companies operate in. Hermes EOS aims to continue and potentially increase its collaboration with the CDP to improve the overall standards of environmental performance management among Chinese companies. This may involve working together on a larger stakeholder platform.

The AmericasGo to Top

An energy company published its first ever climate change scenario planning and stress-testing report, fulfilling the CEO’s commitment to look into the matter as a result of Hermes EOS’ presentation at its AGM and intensive engagement efforts. Hermes EOS is heartened that the company appears to embrace the notion of increasing its transparency on this subject and was encouraged by its efforts. Most importantly, the exercise has led to a healthy, robust dialogue at the company – internally and externally – and demonstrates its commitment to working with investors to expand future versions of the report and undertake regular updates in response to shareholder feedback. Overall, the company’s attitude towards enhancing its communications on stress-testing and scenario planning has markedly thawed and it is beginning to more fully embrace the value of these efforts.

On behalf of PNO Media, Hermes EOS conveyed to a US company the rationale for supporting two shareholder proposals at its AGM and expressed support for all the resolutions presented by management. Hermes EOS commended the company for its adoption of proxy access, a move which Hermes EOS had long advocated at the company, and was comforted that the policy is broadly sound in its implementation. However, Hermes EOS opted to support a shareholder proposal aimed at further enhancing this important shareholder right. It feels the proposed amendments to the existing proxy access policy would make it more practical for shareholders to utilise it, while still limiting any possible disruption and maintaining important safeguards, as a result bringing the company’s existing policy more in line with best practice. Specifically, Hermes EOS would like to see the aggregation limit removed from the company’s existing approach so that larger groups of investors can pool together to meet the 3% holdings threshold. Furthermore, Hermes EOS explained its backing of a shareholder proposal requesting more information on the company’s political lobbying activities and the oversight mechanisms which govern them. While the company provides information about its rationale for participating in the political process, its existing disclosures focus solely on political contributions and do not address whether the company has a comprehensive lobbying expenditure policy or any board- or management-level oversight of its direct or indirect lobbying activities. This information would allow shareholders to assess the company’s management of its lobbying-related activities and better understand the risks and benefits associated with these undertakings. Hermes EOS agreed to pick up the matter after the AGM, as part of its continuing discussions with the company on succession planning, once it becomes clear whether the chair/CEO will extend his contract which is due to expire by 2018.

In response to the US President’s executive order to repeal section 1502 of the Dodd Frank Act, which requires US companies to report on how they manage the risk of conflict minerals in their value chains, on behalf of PNO Media, Hermes EOS signed an investor statement to protest against the repeal. The enactment of this rule has helped to improve the management of difficult supply chains and human rights risks, particularly in the Democratic Republic of Congo. Serious abuses of human rights still occur in conflict mineral supply chains and the repeal of the law may result in fewer efforts to resolve them.

Asia-PacificGo to Top

Hermes EOS was pleased with the significant improvements an Asian company has made to the composition of its board and its overall openness towards the views of investors. The company is proposing to move from its existing two-tier board structure to a unitary one with an audit committee. While Hermes EOS does not welcome such a transition when the motivation is unclear or superficial, the company explained that, by separating the executive and monitoring functions, the move enables the board to focus more on strategy. Encouragingly, this was influenced by the opinions of non-executive directors as part of a board evaluation and learnings from the company’s international business partners, whose decision-making is faster. While Hermes EOS – on behalf of PNO Media – welcomed the appointment of a second woman to the board, it also pushed for internationalisation of the board. The company thinks that this will be difficult, largely because of its remuneration structure and the relatively low levels of pay for directors in its home market. However, it plans to review its executive remuneration structure and increase the portion of variable pay. Hermes EOS suggested that it link the key performance indicators to its new mid-term business plan. Furthermore, Hermes EOS welcomed the company’s intention to continue to sell some of its cross-shareholdings this year. It faces difficulties in selling the shares of other companies, particularly smaller ones, as their funding from banks would be affected by its sale of their shares.

On behalf of PNO Media, Hermes EOS sent a letter to Japan’s Financial Services Agency (FSA) to raise concerns about the prevailing practice of cross-shareholdings in the country. Backed by several large global investors, the letter stated that many companies still believe it to be acceptable to hold shares of other companies to maintain long-term business relationships and listed a number of reasons why the practice is problematic. These include obstruction to fair competition and the effect of cross-shareholdings on governance practices and shareholder rights, which many companies appear to fail to understand. Hermes EOS highlighted that these issues are believed to be a contributor to deterring investments in Japanese companies and could thus be a major obstacle to the growth of the Japanese market. As a first step, Hermes EOS encouraged the FSA to strengthen the disclosure requirements for cross-shareholdings.

 

Europe ex-NetherlandsGo to Top

Hermes EOS commended the new remuneration policy of a financial services company, which was presented by its head of rewards. A fruitful meeting with the company in November 2016 had enabled Hermes EOS to feed early into the process with its updated remuneration guidelines. As a result, the new policy meets all of Hermes EOS’ key expectations. Quantum has been brought back to market median, resulting in a 40% decrease in the CEO’s fixed pay and 100% cap on variable pay. The structure is clearly aligned with long-term value creation, with the bonus taken out altogether and the long-term plan, which is entirely based on shares, encompassing seven years for the CEO. It is built on a set of performance conditions fully disclosed and aligned with the strategic plan. However, the shareholding requirement for the CEO is 200% – lower than the 500% recommended in the Hermes EOS principles – to be acquired through his own funds. On behalf of PNO Media, Hermes EOS also welcomed the simplicity of the long-term scheme, which apart from regulatory conditions, relies on only three indicators. Hermes EOS questioned the risk of the plan becoming void during difficult and volatile market conditions. The company agreed that a number of external circumstances could hinder the strategic plan, in which case the board would go back to its shareholders to revisit the incentive scheme. Positively, the suggestions of Hermes EOS had been taken into account, as the policy describes precisely how board discretion can be exercised only downwards and following the assessment of clearly defined parameters. Hermes EOS expressed its support for the policy. With regard to governance, Hermes EOS welcomed the simplification of the board structure, which it had called for, with the removal of two vice chair positions. It also called for an extended role of the remaining vice chair, to include the duties normally undertaken by lead independent directors, such as dialogue with shareholders.

On behalf of PNO Media, Hermes EOS welcomed the publication of energy efficiency targets and the inclusion of greenhouse gas reduction targets in the executive remuneration scorecard of a UK company. The CEO explained to Hermes EOS that this is leading to a concerted effort to deploy new technologies to reduce energy and water use in its operations. The company also committed to producing a further report on the risks and opportunities to the business from low-carbon scenarios. Furthermore, the company has conducted a site-level analysis of water risks and improved its efficiency of water use. In response to a question by Hermes EOS, it admitted that it needs to improve its approach to wider water catchment usage. Hermes EOS also pressed the company on why it has not disclosed any analysis of the risks associated with non-controlled joint ventures. Hermes EOS offered to informally review the final version of the low-carbon scenarios report. It also challenged the company on the extent of stretch in the greenhouse gas reduction targets it has published.

On behalf of PNO Media, Hermes EOS supported the recommendations on the ethnic diversity of UK boards made by the Parker review. Nevertheless, in its response to the consultation, Hermes EOS suggested a clearer reference to adherence to the principle of comply-or-explain. Hermes EOS also encouraged less prescriptive recommendations on ways to achieve this. It pressed for the disclosure of a more all-encompassing strategy by companies on diversity to give ethnicity equal consideration alongside gender and other relevant aspects to foster deeper organisational buy-in and drive change that goes beyond being merely a box-ticking exercise.

The NetherlandsGo to Top

Following up on its previous discussions where Hermes EOS had encouraged integrated reporting, Hermes EOS was pleased to learn during a meeting that this will now be provided by the Dutch company. However, Hermes EOS remains concerned that sustainability matters continue to be insufficiently integrated internally. On behalf of PNO Media, Hermes EOS encouraged enhanced disclosure on bribery and corruption and tax payments and provided best practices example from other companies. It also agreed to set up a meeting with the company’s new head of sustainability. However, disappointingly, the director of global sustainable development informed Hermes EOS that the process of refreshing the company’s policy on bribery and corruption has not been finalised yet. Originally, this was planned for 2016. Hermes EOS believes that articulating a robust policy on bribery and corruption for the company’s emerging market portfolio is important, especially given that a number of the markets it operates in feature on Transparency International’s list of countries with high levels of perceived corruption. The director of global sustainable development explained that the policy has been waiting for final approval from the board. Hermes EOS therefore wrote to the company to encourage the acceleration of the process and the public disclosure of the policy. Hermes EOS also suggested that the company join the Together for Safer Roads initiative, a global coalition which encourages the sharing of knowledge, data, technology and global networks in order to tackle road deaths and injuries.