Enlightened Shareholder Model

8/3/2019 Enlightened Shareholder Model

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SUSTAINABILITYGOVERNANCEPORTUGUESE

COMPANIES IN ANINTERNATIONALCONTEXT


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1. INTRODUCTION

2. SUSTAINABILITY AND GOVERNANCE

2.1. Defining Sustainability and Corporate Governance

2.2. Theoretical Models of Governance

2.3. The Shareholder Vs. Stakeholder Model

2.4. The Enlightened Shareholder Model

2.5. From Theoretical Models to Existing Governance/Board Systems

3. ANALYSIS OF GOVERNANCE MODELS FOR SUSTAINABILITY USING THE SAM

SUSTAINABILITY ASSESSMENT METHOD FOR THE DJSI

3.1. Companies listed on the DJSI and the PSI20

3.1.1. Corporate Governance Systems

3.1.2. The Scope of Supervision and its Specialisation

3.1.3. Specialisation in Supervision and Execution

3.1.3.1. Supervision and Execution in the Area of Sustainability

Governance for Sustainability

4. STAKEHOLDERS EXPECTATIONS AND THEIR INTEGRATION INTO GOVERNANCE

MODELS

4.1. Implications for Governance Models

4.2. Examples of the Integration of Stakeholder Expectations into

Governance Models

4.3. Examples in the Banking Sector

4.4. Examples in the Construction Sector

4.5. Examples in the Distribution Sector

5. FINAL THOUGHTS AND REFLECTIONS

6. RECOMMENDATIONS

7. BIBLIOGRAPHY

8. ANNEX 1 VARIABLES USED IN THE ANALYSIS

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INDEX

SUSTENTARERESEARCHSofia Santos | Pedro Barbosa

DESIGNRita Botelho

SAMRESEARCHEdoardo Gai

NOTE: The quantitative analyses carried out in this study were based on information relating to the year 2007.

TRANSLATIONPhillip Burns


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This document begins with a brief explanation of

the concept of corporate governance, as well as thehistorical development of the Shareholder, Stakeholderand Enlightened Shareholder Models. In view of thefact that the variables analysed by SAM to evaluatecompanies for listing on the DJSI are considered asa benchmark for identifying existing best practices,we have attempted to attribute the most appropriateSAM variables to each of these models. Based on theanalysis that we have carried out, we consider that theEnlightened Shareholder Model should be consideredas the most appropriate for the currently existing social,economic and environmental conditions and for the

coming years.

NOTE: This text was based on the book CorporateGovernance Principles, Policies and Practices,Bob Tricker. Oxford University Press. 2009

During this decade, pressure from institutional investors

and the media increased on Boards of Directors andindividual directors. The importance that shareholderproxy votes could have on governance structures wasalso recognised, leading to an expectation that theresponsibilities of BoDs should go further than thoseexisting in the 1980s. Reports such as the CadburyReport in 1992 and the King Report in 1995 are justsome of the principal documents, which marked thebeginning of a change of attitude concerning thefunctions and obligations of Board Directors. It wasrecognized that abuses of power had occurred, whichled to recommendations being made to set up audit

committees, to include independent non-executivedirectors on boards, to separate the duties of Chairmanand Chief Executive, and to implement measures whichwould protect the interests of small shareholders.

There is no doubt that, today, societys expectationsare changing concerning the performance of BoardDirectors. It is expected that company value will increasebut not due to creative accounting; institutionalinvestors point to situations of weak managementand excessive remuneration, which demand improvedcorporate governance. The movement occurring inthe 1970s that viewed companies as entities withresponsibilities towards the societies in which theyoperate has acquired new vigour and a new perspective.At the end of the 1990s, environmental, social, ethicaland human rights issues, among others, became part ofthe list of topics that society expected to see integratedinto the policies of companies. This means that BoardDirectors are also expected to take a position andincorporate these issues into their decision making.Thus, the so called Corporate Social Responsibility (CSR),which proposes the integration of economic, socialand environmental factors into company management,has brought a new approach to business that must be

incorporated into existing governance models.

This research paper aims at identifying how companieshave incorporated CSR issues into their governancemodels. The research was carried out using two differentinformation sources: companies which make up the DowJones Sustainability Index, and Portuguese companieswhich form the PSI 20 [1] index of the Portuguese StockExchange. The research leads to identifying a number ofactions, which Portuguese companies should take if theywish to reach the level of existing best practices and thusbecome more attractive assets to institutional investors.

1.INTRODUCTION

[1]The quantitative data analysed takes into consideration companies which in 2008 were listed on the PSI120 and the DJSI. In the case of Portugal,analysis of the PSI 20 included another company Impresa since, although it was de-listed in February 2008, can be considered to have some goodgovernance practices. The quantitative data analysed relates to information for the year 2007.


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company directors as responsible for the appropriatemanagement of company resources. He also states thatdirectors should take into consideration the expectationsof all stakeholders in the decision making process, notjust shareholders. He also argues that transparency andaccountability should always be present in a companysday to day activities, especially at board level.

However, the recommendations of the Portuguese

Securities Regulator for publicly quoted companiesin Portugal is focused almost exclusively on howcompanies should be transparent and accountableto their shareholders, and are much less specific inrelation to their accountability to other stakeholders.

Despite the differences that exist about what constitutesgood Corporate Governance, there is general agreementthat Corporate Governance involves building a systeminvolving people, processes and policies, which aims toachieve the following goals:

The efficient use of the organisations resources;

Making the Board of Directors responsible toshareholders for the companys results; Aligning the interests of the Board with those of

shareholders; Ethical and responsible conduct towards society and

relevant stakeholders; Acting transparently towards all stakeholders of the

company; Using the resources of the company, managing the

expectations of all stakeholders, and making its longterm profitability goals compatible with the principles

of the sustainable development of society.

2.1. DEFINING SUSTAINABILITYAND CORPORATE GOVERNANCE

Corporate Governance

Corporate Governance can be defined as a system which

controls and manages company activities. This systemis made up of the policies, processes and people, whichare necessary in order to meet the expectations of thecompanys shareholders and other stakeholders withintegrity, respect, transparency and in a responsiblemanner.

There have been many individuals who have contributedtowards explaining and providing training in CorporateGovernance. However, it is particularly important tohighlight the contribution of Sir Adrian Cadbury, who wasresponsible for the much publicised Cadbury Report,

which states that corporate governance is concernedwith achieving a balance between social and economic

objectives, and between the objectives of individuals

and the company. The corporate governance matrix

exists to encourage the efficient use of resources and

also to ensure that someone is held to account for the

way in which these resources are used. The goal is to

align as closely as possible the interests of individuals,

corporations and society. (Sir Adrian Cadbury, GlobalCorporate Governance Forum, World Bank, 2000)

Mervyn King, who wrote the King Report, is anotherkey reference in the development of CorporateGovernance. He also uses a broad definition, recognizing

2.SUSTAINABILITYAND GOVERNANCE


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Corporate Sustainability

The definition of sustainability and Corporate Social

Responsibility continues to be subjective and withoutconsensual agreement in the business and academicworld.

The definition of Sustainable Development, a legacy fromthe Brundtland report Our common future, definesSustainable Development as development which meetsthe needs of the present without compromising theability of future generations to meet their needs.

The concept of Corporate Social Responsibility adaptsthe Brundtland definition to the business context. Itstates that a companys responsibility does not simplyinvolve maximising profits for shareholders but alsocarrying out its activities ethically in its dealings with allstakeholders and in relation to the eco-systems in whichit operates.

CSR is concerned with treating the stakeholders ofthe firm ethically or in a responsible manner. Ethical

or responsible behaviour means treating stakeholdersin a manner deemed acceptable in civilised societies.

Social behaviour includes economic and environmental

responsibility. Stakeholders exist both within the firmand outside. The wider aim of social responsibilityis to create increasingly higher standards of living,

while preserving the profitability of the corporation,for peoples both within and outside the corporation

(Hopkins, 2003, p. 1).

Thus, Corporate sustainability is understood as theability of companies, through its governance practicesand market presence, to positively influence ecosystems(improving natural resources, reducing pollution

levels, etc), society (supporting local populations,creating employment etc.) and economic development(distributing wealth through dividends, paying fairsalaries, respecting supplier payment obligations etc.).Companies with sustainability practices will be morelikely to operate in harmony with the societies in whichthey operate, maintain their market presence and helpmaintain and increase profitability levels.

The concept of corporate sustainability thereforeimplicitly includes the following:

Efficient management of the social, environmental

and economic factors that affect the company, itsbusiness activities, products and services, and their

impact throughout the entire value chain; The management of stakeholder expectations,

balancing and managing the social, environmental

and economic risks that have the potential toadversely affect relationships with stakeholders ofthe company; Adoption of practices and behaviour, which are

compatible with the values of society. The ability to offer products and services that

attach environmental, social and financial valueto their levels of quality, perceived as such bycustomers and providing a clear license to operate(from all relevant stakeholders).

The need to change the Governance paradigm

Embedded in the concept of Corporate Sustainability isthe opportunity for companies to achieve a significantlevel of differentiation.

By adopting the concept of sustainability, starting fromthe core of the business - in other words the productsand services that the company sells - and implementing

it throughout the entire organisation, the company candevelop strategies and management models that createsocial, environmental and economic value, generatinghigher levels of profitability in the short and longterm. It is precisely in this respect that the conceptsof corporate sustainability and corporate governanceinterlink and provide a new governance paradigm.

To maximise company value, it is essential to developa system made up of people, policies and processes(Corporate Governance), which incorporates a positive

response to the companys social, economic andenvironmental risks and opportunities that havethe potential to influence the performance of theorganisation.

We define Governance for Sustainability in thisreport as that Governance Model, which ensures theappropriate management of social, environmental andeconomic factors, taking into consideration and givingdue weight to the expectations of society.

2.SUSTAINABILITY AND GOVERNANCE


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and the remaining stakeholders can have differentforms of theoretical expression, which can later betransformed into functional systems of company

governance.

Despite the fact that theoretical Shareholder,Stakeholder and Enlightened Shareholder modelsexist, which can then be reflected in functional modelsnormally referred to as the Latin/Strengthened Latin,Anglo-Saxon and German Models, we should neverforget the cultural and historical context in whichthe companies in question exist. Governance modelsare a reflection of the economic, historical and legalbackground of a country, as well as of that of thebusiness environment. They are also determined by thepower structures that exist in the economy and by theavailable financial options for developing the business:

The role that the financial markets, banks andinsurance companies have in the economy The role played by the Government as shareholderand investor The percentage of free float shares on the market The level of share capital concentrated in one ormore shareholders

The differences that exist in these areas may justify theexistence of different governance models in the USA andwithin Europe (Miguel A. Mendez). So it is not surprising

that there is no consensus about what constitutesgood governance practices. In different countries, thesuccess of similar models can vary. Different countrieshave different cultures, and society can have differentexpectations which can lead to different ways inwhich management practices develop. In spite of theknowledge of different societies about sustainabilityissues and the fact that the role of companies variesbetween companies in relation to this process, it ispossible to highlight a number of studies which givecredence to the empirical belief that society is becomingmore demanding in relation to companies and the

manner in which they should protect the environmentand as a result promote sustainability. For example,in February 2009, a market study in the USA (OpinionResearch Corporation, 2009) concluded that evenin a recessionary period, the interest of Americansconcerning environmental issues had not diminishedand that consumers were paying more attention to whatcompanies were doing in relation to environmentalmatters. Also in 2008, a worldwide study carried out bythe National Geographic (National Geographic, 2008),which involved collecting information in 17 differentcountries, concluded that environmental problems wereranked 4th among the main problems faced by countriesafter those concerning the economy, unemployment andpolitics.

2.2. THEORETICAL MODELS OF

GOVERNANCE

The need for governance models

The reason that governance models are important forcompanies is linked to the possibility that asymmetricalinformation may exist between Managers/Directors andShareholders. In academic circles, this issue is knownas the Agent/Principal Theory. This theory focuses onthe fact that managers and shareholders can have

different interests, due to asymmetrical informationexisting between the Principal (the shareholder) whohires - and the Agent (Director/Manager) - who is hiredto manage the company to maximise the profits of thePrincipal. The managers, who are responsible for the dayto day management of the company, may have accessto specific information, and may, if appropriate ethicalstandards are not in place, use it opportunistically intheir own personal interest instead of using it in theinterests of shareholders.

In the 21st century, the Principal/Agent Theory has

gained particular relevance in relation to governanceissues, since the beginning of the century was markedby financial scandals very much connected to issues ofresponsibility, transparency and governance. The Enronand Parmelat cases are just two examples. Thus, notonly the theory but also the examples in practice canlead us to recognise that:

The management and Board of Directors havean advantage in relation to shareholders and otherstakeholders concerning the information to which theyhave access; Management and sometimes the Board ofDirectors have a natural tendency to give themselvespreferential treatment; Stakeholders in particular Shareholders veryoften lack information and analytical knowledge aboutthe situation of the company in order to effectivelydefend their interests through mechanisms existingspecifically for this purpose; Managers/Members of the Board, who shouldrepresent the interests of shareholders, are oftenconfronted with conflicts of interests related to theirmutual interdependence.

The points mentioned above are some of the main

issues which justify the importance of the existence ofgovernance models and their mode of operation. Therelationship between Managers/ Directors, Shareholders


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The increased pressure coming from society andregulators for companies to divulge how they are

dealing with these emerging issues led to the idea thata good governance model should also be able to explainhow sustainability issues are managed by the Boardof Directors. In reality, since sustainability embraceseconomic, governance, ethical, social and environmentalissues, some experts believe that Governance should beconsidered as an integral part of Sustainability, and notthe other way around. This is also the implicit approachtaken throughout this document.

In order to analyse how Portuguese companies listedon the PS120 and those on the DJSI are integratingsustainability, we based our study on existing theory,and examined our findings in the light of the goodgovernance principles used by SAM. For Portuguesecompanies, publicly available information was used,while for DJSI companies it was possible to collectanonymized information supplied by SAM. Beforepresenting the main results found, we begin with abrief explanation of the different existing governancemodels Shareholder, Stakeholder and EnlightenedShareholder as well as the functional systems that

governance models can have, such as the Latin/Strengthened Latin Model, Anglo-Saxon and GermanModels.

GOVERNNACE

SOCIAL

ENVIRONMENTAL

SUSTAINABILITY: ENVIRONMENTAL, SOCIAL AND

GOVERNANCE ISSUES

2.3. THE SHAREHOLDER VS.

STAKEHOLDER MODEL

Shareholder model

The theory supporting the shareholder model builds onthe relationship between the owners of companies theshareholders and board directors. In countries suchas the UK and the USA, in which the share capital ofpublicly quoted companies is highly fragmented amonga large number of small shareholders, this relationshipis based on the agency theory where the principal (theshareholder) delegates power and control to an agent(directors).

In this theoretical model, it is the market itself whichdoes the job of controlling the quality of management ofBoards of Directors (BoD) of listed companies, the goalof the BoD being to maximise gains for shareholdersor, in other words, to maximise profits. Market scrutinyin relation to the quality of management is based onthe idea that in competitive markets, there will be lessdemand for shares in under performing companies,

resulting in a lower share price. This downward pressureon share price by market forces might lead to anincrease in the vulnerability of the company to hostiletakeovers (putting at risk the jobs of the Board and topmanagement) or to a move by shareholders to replacethose directors.

Under this theory, the Boards of Directors, by the simplefact that they want to protect their jobs and reputation,will always seek the best strategic direction to lead thecompany to success, maximising profits for distributionamong shareholders.

The rationale behind this model is based on the followingassumptions, which are seen by some as too simplistic:

All relevant information is available. In other words,

all economic agents involved (in this particular caseshareholders and potential shareholders) have accessto all relevant information to take well informeddecisions; Market barriers do not exist, meaning that all

economic agents can buy and sell shares without anylimitations (the only limitation being their available

income).

Source: Sustentare



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SHAREHOLDER MODEL ISSUES

AS RECOMMENDEDBY REGULATORS AS ASSESSED BY SAM FOR THE DJSI

Procedures for disclosing information in a trustworthy andtransparent manner.

Formal definition of responsibilities, contracts andremuneration conditions.

Inexistence of measures to protect board directors.

Inexistence of market barriers.

Minimum number of independent board directors; Chairman is neither CEO nor ex - CEO; Members of strategy, risk management/audit and ofselection, nomination and remuneration committees are nonexecutive and independent.

Formal responsibilities of the Board of Directors:- Strategy;- Risk management/audit;- Selection, nomination and remuneration;

The remuneration of board directors is made public(preferably by individual director); The system of evaluation of the performance of boarddirectors is made public.

Inexistence of a staggered board; Inexistence of golden parachutes [2]; Inexistence of limits to change the statutes; Absolute majorities for merger/acquisition situations are notnecessary; Inexistence of poison pills [3].

However in practice, these two assumptions are notalways valid. In view of the simplicity of this model,particularly if we take into consideration the broad

range of issues that can impact a company in todaysworld, it is not surprising that under the SAM evaluationsystem of the governance models of companies, awide range of variables are analysed. In fact, somerecent management scandals, involving situations inwhich the regulatory guidelines had not been followed,can be seen as a consequence of this simplicity. As aresult, ideal conditions existed for managers (agents)to use privileged information in order to pursue theirown interests rather than those of the shareholders

(principal). It is interesting to note that in some recentbankruptcies, clauses of a golden parachute [2] typein the contracts of board directors were common. It

was also common that the remuneration packages formanagers were indexed to the short term performanceof companys shares. Short term incentives for directorshave proved to be a potentially dangerous incentive tomaximise profits. Instead of aligning the interests ofthe agent and principal in the short and long run, it canencourage unethical and illegal practices which canlead to the fall of profitable companies. This was whatoccurred in the case of Enron, or more recently, theMadoff scandal.

Source: Sustentare and SAM.

Stakeholder model

At the other end of theoretical governance models is thestakeholder model. According to the theory underpinningthis model, the company no longer has the sole objectiveof creating value for the shareholder, but to create anddistribute value for all its stakeholders.

This paradigm change has explanations based on twomajor premises: Ethical and moral arguments - which state

that the integration of these into questions relating tocompany management constitutes a moral responsibilitytowards stakeholders; Value creation - which states that, for a company

to create value for its shareholders, it has to create anddistribute value to all other stakeholders and meet theirexpectations.

Since the objectives of the company in this model are notlimited to those of the shareholders, the interests of othershareholders will be represented at board level.

TABLE 1

[2] Golden Parachuts: Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss oftheir job. Benefits include items such as stock options, bonuses, severance pay, etc. A golden parachute can be used as a measure to discourage anunwanted takeover attempt.[3] Poison pills: A strategy used by corporations to discourage a hostile takeover by another company. The target company attempts to make its stockless attractive to the acquirer.


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[4] As happens in Germany, where these kinds of competencies for workers representatives on Boards of Directors are precisely defined in legislation.[5] The OECD principles for corporate governance can be seen as being based on this type of model.

Employees, unions and suppliers have an activerole in monitoring the performance of the board and

management teams, and will even play a part in thedefinition of the companys strategy. The BoD has a dutyto maintain a balance between the various stakeholders.

This model has been criticised by the advocates ofthe shareholder model because they consider it tobe impossible for a company to follow several goalssimultaneously, which can very often be contradictory.Those who believe in the stakeholder model replythat value creation for stakeholders creates value forshareholders (who are one group of stakeholders), andthat in order to create value for shareholders, one must:

Create and offer products and services that

customers want to buy; Offer jobs in which employees are interested and

which they are proud to hold; Build good relationships with suppliers so that they

continue to work for the company; Be socially responsible in order to be accepted by

local communities.

In short, profitability depends directly on satisfying theneeds of the companys stakeholders.

In order for these governance systems to be successful, anumber of basic criteria must be met, such as:

The existence of a legal framework which defines

precisely the roles of each stakeholder in the structureof each organisation [4]; The ability of the representatives of each stakeholder

group to effectively articulate their expectations anddefend their interests; The ability of the board of directors to follow

the various objectives of the various stakeholders

simultaneously.

However, this model has significant limitations inpractice, the main ones being:

The tendency for conflicts of interest and

disagreements among the various stakeholders to beresolved informally; The lack of transparency and manipulation of

information destined for some stakeholder groups, thegoal being to influence their decisions; The great difficulty (or even impossibility) of boards of

directors to follow various objectives, which very often

can be contradictory.

2.4. THE ENLIGHTENED

SHAREHOLDER MODEL

This model arose from the basic premise that thetwo models presented above are not incompatible ormutually exclusive.

Thus, a synthesis of the advantages and limitations ofthe shareholder and stakeholder model is made, fromwhich the Enlightened Shareholder Model arises. Forthis model:

The main objective is to maximise shareholder

value; It is assumed that to create value for shareholders,

one must understand the expectations of the differentstakeholders which influence and are influencedby the company, and act accordingly with theexpectations of the main stakeholders of the company.

Therefore this model starts from the principle that forthe company to be successful it must have:

Satisfied customers, who wish to buy its products

and services; Motivated employees, who wish to do the jobs

available; Satisfied suppliers through being treated as

business partners; A licence to operate from and acceptance by the

communities among which it operates.

The model thus attributes critical importance tocompanies defining relationships with their strategicstakeholders. In turn, the strategic dialogue withstakeholders leads companies towards the need tointegrate sustainability into their business models [3].

In other words, this means that companies should takeinto account aspects such as:

Ethics; Quality of products and services and customer

satisfaction; Working conditions;

Employee satisfaction; Strategic relationships with suppliers;



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Involvement with the community and strategic

philanthropy; Eco-efficiency and respect for the environment.

For companies to be able to meet these newrequirements, it is essential that sustainability isintegrated into their governance models.

These are also the factors that are taken into account bySAM when evaluating companies which are part of theDJSI.

We can thus say that companies, which wish to becategorised as having enlightened shareholder andstakeholder models, must provide the right answers tothe questions asked in SAMs evaluation methodology.

ENLIGHTENED SHAREHOLDER AND STAKEHOLDER MODELS

DISTINCTIVE CHARACTERISTICS OF THE MODELS SAM VARIABLES FOR THE DJSI

The importance of ethics

Quality of service and customer satisfaction

Work conditions and employee satisfaction

Involvement with the community and strategicphilanthropy

Respect for the environment and eco-efficiency

Anti bribery and anti corruption codes and/or practices exist which are applicable to

all company employees and all of its activities.

Quantitative targets for customer satisfaction, as well as actual results, exist whichare externally communicated; Approaches exist for relationships and dialogue with customers, as well as forintegrating their feedback into management; A certified quality management system exists.

Management and performance indicators in terms of ethnic diversity, genderequality, freedom of association and health and safety; Whistle blowing procedures exist which ensure the confidentiality of thoseemployees making a complaint; Policies and performance indicators for training and competencies management; Employee satisfaction surveys and their results; Benefits given to employees over and above those that are mandatory by law

(pension plans, health insurance, flexible working hours etc.)

The company should have a system which allows its social impact and contributionto be measured in order for it to be able to improve / realign its philanthropic strategy/ investment in the community; The company should report on its performance in the area of communityinvestment using policies and quantitative indicators.

The company has specific reduction goals for: Greenhouse Gas emissions; Total energy consumption; Total water consumption; Waste generated.The company periodically reports on its environmental performance.The company has a certified environmental management system.

Source: Sustentare and SAM.

The level of integration of all these aspects into thecompanys organisation is evaluated through:

The existence or otherwise of the formal

responsibility of the Board of Directors forsustainability management, in other words forthe integration of aspects relating to sustainabledevelopment into its governance model at the veryhighest level;

The existence of variable remuneration that

depends on the environmental and/or socialperformance of the company.

TABLE 2


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2.5. FROM THEORETICAL

MODELS TO EXISTING BOARDMANAGEMENT SYSTEMS


The three theoretical governance models presented inthe previous section can be put into practice throughdifferent functional Board Management Systems, as the

diagrams below demonstrate:

LATIN/STRENGTHENED LATIN MODEL

ShareholdersGeneral Meeting

Board ofDirectors

[1]

Fiscal/AuditBoard

[2]

OfficialStatutory

Auditor (ROC)

ANGLO SAXON MODEL


Board ofDirectors

ExecutiveBoard

Chairman andNon Executive

Members

AuditCommittee

TWO TIER MODEL (GERMAN)


ROC

Supervisory Board

ExecutiveBoard

CMF[3]

Source: The diagrams presented arebased on: 2006, Carlos Tavares, CMVM,Company Corporate Governance and

Social Responsibility; 2007, Christine A.Mallin, Corporate Governance

StatutoryAuditor

[1] Executive and Non Executive Members have the role of challengersand involvement in decisions that are not part of the day to day running of the

company[2] Majority of Independent members have the role of auditing and followingup on the executive management of the ROC

[3] Financial Matters Committee majority of independent members


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The table below is an attempt to explain the potentialrelationship that exists between theoretical modelsand systems of governance, in spite of the fact that

controversy exists about the assumptions made.

SHAREHOLDER

ONE TIERSYSTEM

ENLIGHTENED SHAREHOLDER STAKEHOLDER

TWO TIERSYSTEM

A single board entity elected by the Shareholders GeneralMeeting.

Close proximity (very often it is the same person) between theChairman of the Board of Directors and the Chief ExecutiveOfficer

Shareholders have greater control and ability to influence theExecutive Board

Dual board entity in which, in most cases, only thesupervisory group of board directors is elected by theGeneral Meeting. Normally (but not necessarily), this is theentity that appoints the Executive Board of Directors.

A high level of separation and independence between theSupervisory Board, which supervises, and the ExecutiveBoard of Directors, which executes.

When the Supervisory Board elects the Executive Board,shareholders have less control and less ability to influencethe Executive Board.

Source: Sustentare

NOTE: The theoretical enlightened shareholdergovernance model is compatible with all board systemsand models. The use of the German model doesnot necessarily mean that the Board is made up ofrepresentatives from different stakeholders. Historically,this model began life in Germany and imposes anobligation to have employees represented on the Board.Portuguese companies, which have adopted this model,have a Board of Directors compatible with the theory ofthe Shareholder or Enlightened shareholder model.

Supporters of the one tier model believe that with oneBoard level, there is a better relationship between allthe Board directors and a better flow of informationbetween them.

Supporters of the two tier model say that with a dualBoard structure, a clearer separation of duties existsbetween those who supervise/evaluate and those whomanage and are evaluated.

Whether the dominant structure is dual or unitary, themain concerns of the legislators in this area are thefollowing:

The manner in which the Supervisory Board and

the Board of Directors function; The key committees of supervisory entities;

The existence of a sufficient number of

independent directors; Defending the rights of shareholders (especially

minority shareholders).

TABLE 3: THE THREE TYPES OF CORPORATE GOVERNANCE SYSTEMS


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3.ANALYSIS OF GOVERNANCE MODELSFOR SUSTAINABILITY USING THE SAMSUSTAINABILITY ASSESSMENT METHOD FORTHE DJSI

of the Board of Directors. These members are electedat the Annual Shareholders General Meeting and arerepresentatives of the majority shareholders of thecompanies involved. This difference is crucial whengovernance systems in Portugal are compared withinternational ones, given that almost 100% of DJSI listedcompanies use Anglo Saxon or German Models (with aseparation between the Executive Board and the Boardof Directors), while in Portugal this figure is only 39%.

3.1. COMPANIES LISTED ON THEDJSI AND THE PSI20

3.1.1. CORPORATE GOVERNANCE SYSTEMS

Taking into consideration the three corporate governance

systems defined above, and using the informationpublicly available, our conclusion is that the mostcommonly used model in Portugal in companies listedon the PSI20 is the Strengthened Latin Model. Thismodel differs from those commonly used internationallyby the fact that international models have supervisoryentities made up of members, who are not members

TABLE 4: THE FORMAL RESPONSIBILITY OF BOARDS OF DIRECTORS

GOVERNANCE MODELS COMPANIES (OUT OF 21) RESULT PSI 20+1 RESULTS DJSI

Strengthened Latin Model

Anglo Saxon Model

German Model

13 61,9%

6 28,5% 81%

2 9,5% 19%

Source: Sustentare, SAM - 2007 data

[PORTUGAL] [PORTUGAL]


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3.1.2. THE SCOPE OF SUPERVISION AND ITS

SPECIALISATION

Specialized committees for the management orsupervision of organisations are a reality among thecompanies in the main Portuguese stock marketindex. The need for specialised executive managementis natural and understandable. The same applies tothe supervision of companies. Companies with betterimplemented governance systems will be those whichwill not only stimulate and improve the specialisedexecutive management of its businesses but also theirspecialised supervision.

This new paradigm is even more relevant when welook at the diversification of business and expansionto new markets of Portuguese business groups. Thesetwo factors have made business groups more complexand more competitive, factors which make efficient

supervision of the organisation even more relevantby their respective supervisory boards and Boards ofDirectors.

The Board of Directors of a company is the representativeof shareholders and as such has a responsibilityto ensure the efficient management of the entireorganisation. This entity thus has the responsibility ofensuring efficient executive management and supervisionof the organisation with the goal of meeting the dividendexpectations of the shareholder, while at the sametime providing transparency and responsible behaviourtowards all stakeholders.

In relation to the formal responsibility assumed byPortuguese companies in their Corporate Governancereports, the following table shows the frequency withwhich variables from SAM questionnaires are found inpublicly available documentation:

TABLE 5: THE FORMAL RESPONSIBILITY OF BOARDS OF DIRECTORS

FORMAL RESPONSIBILITY Companies (out of 21) Result PSI 20+1 Results DJSI

Strategy

Monitoring and supervision of management

Risk Management

Audit

Selection, nomination and compensation of board directors

Corporate social responsibility, organisational citizenship andsustainable development

Compliance with current regulations, legislation and internalstandards

20 95% 95%

19 90%

12 57%

96%

16 76%

6 29% 94%

8 38% 84%

15 71%

n.a

n.a

n.a: non-available

The vast majority of Portuguese companies confirmthe theory, which states that responsibility for the longterm strategy of the organisation and the monitoringor supervision of day to day management is that of theBoard of Directors.

Nonetheless, we are witnessing a process of changein the governance of listed Portuguese companies, inwhich, by taking on the responsibility for supervisingexecutive management, Boards are beginning tosegment, specialise and specify which kind of supervision

should being carried out at Board level. In particular:

For 76% of companies listed on the PSI20, the

Board of Directors has formal responsibility for thesupervision of financial matters and all organisationalaudits (8 of which have the Strengthened Latin Model). For 57% of PS120 companies, the Board of Directors

has formal responsibility for risk managementsupervision For 71% of PSI20 companies, the Board of Directors

has formal responsibility for the supervision of




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16 |17

two new areas, which are expected to begin to be part ofthe Governance agenda in Portugal in the near future.In general, it can be said that in terms of strategy

and supervision, the responsibilities taken on by theBoards of Directors of PS120 companies do not differsignificantly from those existing in DJSI companies.However, it is in the area of supervisory specialisationwithin the Board of Directors that the biggest differencesexist between the two samples, namely in the riskmanagement, audit, remuneration and sustainability/social responsibility areas.

compliance with internal and external standards In only 29% of PSI20 companies does the Board of

Directors formally recognise the selection, nomination

and remuneration of Board Directors as its formalresponsibility for the future success of the company,whereas for DJSI companies this figure reaches 94% In only 43% of PSI20 companies does the Board

of Directors assume formal responsibility for thesupervision of Sustainability and Social Responsibility,whereas for DJSI companies the figure is 84%

It can thus be inferred that issues relating toSustainability/Social Responsibility and the selection,nomination and remuneration of Board Directors are

DIRECTORS Companies (out of 21) Result PSI 20+1 Results DJSI

Majority of Executive Directors

Majority of Non Executive Directors

of Independent Directors

5 24% 11%

12 57% 36%

13 62% 53%

We can conclude that PS120 companies have alreadybegun to take these issues into account, since around57% of companies already have Boards of Directors witha majority of Non Executive Directors. Around 62% of

PS120 companies have at least a quarter of Independent

THE COMPOSITION OF THE BOARD OF DIRECTORS AND THE IMPORTANCE OF INDEPENDENT AND NON-

EXECUTIVE DIRECTORS.

The relevance of the regulatory role of top management has simultaneously implied greater relevance for therole of Non Executive Independent Board Directors, since the responsibility for the supervision of executivemanagers of companies falls mainly to them.By definition, the role of non executive directors is the supervision of executive directors, in the name of andrepresenting all shareholders of the company, to ensure that executives are acting in the best interests of thecompany and its stakeholders.With the increase in issues relating to supervision, the relevance of these directors is increasing, especiallythat of Non Executive and Independent Directors, who are entirely free from commitments to executive

management, shareholders and any stakeholder which is dependent on the company or on which the companyis dependent.These are the Directors who ensure that Executive Directors are challenged, monitored and appropriatelyevaluated, according to the performance of the company.Of the 21 companies analysed, only three have (in 2007) a majority of independent directors on their Boards:EDP, MBCP and Impresa.

TABLE 6


Directors, a percentage which is slightly above that of theDJSI sample (53%).

Nonetheless, it should be noted that the criterion used bysome Portuguese companies in 2007 as to what constitutes

3.ANALYSIS OF GOVERNANCE MODELS FOR SUSTAINABILITY USING THE SAMSUSTAINABILITY ASSESSMENT METHOD FOR THE DJSI



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3.1.3. SPECIALISATION IN SUPERVISION AND

EXECUTION

It is common practice for listed companies to delegatetheir executive management to an Executive Committeemade up of Directors with responsibilities for executing theproposed business plan. Among the Portuguese companiesanalysed, 18 delegated executive responsibilities and day today management to an executive committee. This executiveentity is common practice among the vast majority of listedcompanies.

However, it is also common for other specific committees

to exist, which have the responsibility of supervising theorganisation in specialist areas. These committees are intheory more efficient when they are made up exclusively ofNon Executive Directors or Independent Directors.

Among the Portuguese companies analysed, 76% (16companies) delegate audit and risk management tospecialist committees set up for the purpose but only 14of these are made up entirely of non executive directors.In comparison, 83% of DJSI companies have this auditcommittee.

However, Portuguese listed companies differ significantlyfrom those on the DJSI as far as other supervisory functionsare concerned.

In relation to the Nomination or selection of BoardDirectors, only two Portuguese companies delegatethese functions to a specialist entity made up of nonexecutive directors. 68% of DJSI companies have thiscommittee, showing clearly that it is common practiceamong international companies listed on this index.

In relation to the remuneration and salaries ofBoard Directors, the same trend is apparent. InPortugal, only 3 companies have committees made

up of non executive directors with the specific task ofsupporting the Board of Directors by making proposalsfor the remuneration of directors. In the DJSI, 81%of companies already have this committee, and thuscan be considered to be common practice amongcompanies making up this index. Again it is importantto remember that the Portuguese stock exchangeregulators, in accordance with the principles of theLatin Model, recommend that a group of shareholders,in a specific board committee, determine and proposethe remuneration of all Directors.

REPORTING THE INDIVIDUAL REMUNERATION OFBOARD DIRECTORS:

Reporting the individual remuneration of Board Directors

is a recommendation made by the majority of regulatorsin different countries, and Portugal is no exception.No companies analysed in the Portuguese market(in 2007) reveal this information or complies with therecommendation. In the DJSI, 30% of companies reportthis information.

TABLE 7: SPECIALIZED SUPERVISORY COMMITTEES OF THE BOARD OF DIRECTORS

SPECIALIZED SUPERVISORY COMMITTEES OF THE BOARD OFDIRECTORS

Audit and risk management committee or equivalent (made up of nonexecutive directors)

Nominations Committee or equivalent (made up of non executivedirectors)

Remuneration Committee or equivalent

Sustainability Committee

13 60% 83%

Companies (out of 21) Results PSI 20+1 Results DJSI

2 24% 68%

2 19% 81%

5 24% 44%


an Independent Director is different from that usedby SAM. For example, some listed PSI120 companiesconsider Executive Directors as Independent. A casealso exists in which a company adopted a single tiermodel and discloses a greater number of independentthan non executive directors. In 2008 however, someof these anomalies were corrected or changed, whichalso demonstrates how Portuguese companiesare gradually adapting to the CMVM (PortugueseSecurities Regulator) recommendations andinternational best practice.



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3.1.3.1. SUPERVISION AND EXECUTIONIN THE AREA OF SUSTAINABILITY GOVERNANCE FOR SUSTAINABILITY

The relevance of sustainability for the business activitiesof organisations has led, as we saw earlier, to the needto include sustainability management as a direct formalresponsibility of Boards of Directors.

It is important to understand how Boards of Directorsare putting governance in place for sustainability,bearing in mind that they must pay attention to boththe executive management of sustainability and itssupervision, according to the definition of the EnlightenedShareholder and Stakeholder Governance model.

We previously noted that 9 Portuguese companies tookon this area as a formal responsibility of the Board ofDirectors. Of these 9, 6 have chosen to set up formal

committees made up of directors, who discuss, superviseand make recommendations to the Board of Directors tomanage sustainability in the organisation. This tendencyin the Portuguese market is also reflected in the DJSI:44% of the companies in the index have a specialisedcommittee exclusively for sustainability matters at topmanagement level.

Such evidence leads to the conclusion that companiesare concerned not only with specialising and broadeningthe scope of their supervision, but also see thesupervision of sustainability management as being acritical factor. In other words, management of social,environmental and economic factors which impactrelevant stakeholders of the company is so importantto their profitability that a significant share of thecompanies in the DJSI sample have opted to includeits supervision and guidance within the scope of the

responsibilities of Boards of Directors, delegating theformal monitoring of these matters to specific directors.

BOARD OFDIRECTORS

EXECUTIVECOMMITTEE

SUSTAINABILITYCOMMITTEE

. Strategy

. Policies

. CodesReports enough

information to evaluateSustainabilitymanagement

SUSTAINABILITY ORGANIZATIONALSTRUCTURE

GOVERNANCE FOR SUSTAINABILITY

In terms of execution, it follows that, having assumedformal responsibility, companies will seek to develop astrategy, a programme or plan of action, which managesand executes the sustainability agenda, and for which theexecutive committee is the main driver and responsiblefor the implementation of this strategy. Among thePortuguese companies analysed, 12 companiescommunicate clear guidelines for its sustainabilitystrategy. However, only 9 companies communicate theorganisational structure that manages sustainability andenables the strategy to be implemented, evaluated and

communicated internally and externally.

The organisational structure that manages sustainabilityis a crucial element in achieving the objectivesannounced to stakeholders to manage environmental,social and economic factors. It is also an opportunityfor differentiation by companies, since, in view of thecomplex, multi-disciplinary nature of sustainability,cutting across organisational boundaries, there is nomagic formula for setting up an efficient organisationalstructure.

Source: Sustentare



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BOARD OF DIRECTORS

. Assumes the formalresponsability. Decides the strategy and thegovernance model

EXECUTIVE COMMITTEE(EXECUTIVE DIRECTORS)

. Leads the execution

. Build the organizationalstructure that maximizesthe results

ORGANIZATIONALSTRUCTURE

. Executes the strategy

ORGANIZATIONALSTRUCTURE

. Reports enoughinformation that allowsthe evaluation ofperformance

SUSTAINABILITYCOMMITTEE

(NON-EXECUTIVE DIRECTORS)

. Evaluates, challenges anddecides on improvementsto the execution of thesustainabilty strategy.

THE WAY GOVERNANCE FOR SUSTAINABILITY WORKS

Source: Sustentare

It is Important to establish a structure that enables thestrategy approved to be executed by Executive Directors,and supplies information to Non Executive Directorssupervising the company, about the results of this

strategy.TABLE 8: GOVERNANCE FOR SUSTAINABILITY IN LISTED COMPANIES IN PORTUGAL


Formal responsibility of the Board of Directors for Sustainability Management

Specialised committee for Sustainability Supervision

Sustainability Strategy

Organisational structure for sustainability management

8 38%

Companies (out of 21) Results PSI 20+1

5 24%

11 52%

8 38%


Among the companies in the DJSI, it can be seenthat, in addition to a strategy and a structure thatmanages sustainability, these companies have methodsof evaluating the investments that they make insustainability, such as for example:

53% state that sustainability brings benefits tothe business;

79% state that social results and their impacthave been evaluated; 71% state that the impact on corporate

reputation and stakeholder satisfaction has beenevaluated; 71% state that they carry out employeesatisfaction surveys; 95% state that they have set up whistle blowingsystems, which ensure employee anonymity.

Taking all the information above together, we canconclude that the Boards of Directors must build avirtuous cycle of management and supervision, which



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enables them to respond with quantifiable results torelevant stakeholders, who are increasingly concernedwith the companys long term profitability and licence to

operate.

These results show that the first steps in Portugalhave been taken. We have companies such as PortugalTelecom and EDP which are familiar with the conceptsand practices reported in this section. The challengewill be to transform these practices and make themcommonplace among the top listed companies inPortugal.

THE STATUS OF SELF REGULATION AMONG LISTED

COMPANIES IN PORTUGALDue to growing societal pressures concerning the roleof companies, NGOs and civil society are graduallybeginning to debate the legitimate role of companiesin the search for solutions to existing environmentaland social problems. The increasing dialogue aboutthis issue between society and the private sector hasled to institutional agreements being signed, the first ofwhich occurred in the USA in the 1970s. These aimed atimplementing preventive measures against bribery thatmight occur when American companies were runningbusinesses in other countries (Wright, 2006). Over time,

and in line with the changing expectations of society,these codes of conduct gradually began to include social

and environmental issues (Wright, 2006). The codes

were an attempt to fill potential gaps existing betweenlegislation in force and the expectations of society, thus

enabling the private sector to carry out actions, the goalof which was ... to support public political objectivesconcerning social and environmental causes (Labatt andMaclaren,1998 mentioned in Richardson, 2005, p.281).

Since these codes are the result of a number ofstakeholder expectations, they can be considered tobe soft law, which may later be transformed into reallegislation (Scholtens and Dam, 2007). Given that societalexpectations vary over time with various standardsbeing established by different institutions, the functionalorganisation of companies also needs to change in orderto be able to respond to external institutional pressure.

In specific terms, the Enron and/or Parmalat casesat the start of the millennium, or the recent scandalsinvolving unethical behaviour in the banking world,the need to fight climate change or concerns over thesupply limitations of natural resources, have led tocompanies developing internal and voluntary codes ofconduct or adopting international codes. So it is relevantto understand how companies are implementing thesekinds of standard:

TABLE 9


Sustainability Mission (economic, environmental and social factors)

Values include sustainability (economic, environmental and social factors)

Business principles include sustainability (economic, environmental and social factors)

Ethical code

Code of Conduct

Code of Conduct regulating public lobbying

Code of Conduct in relation to sexual harassment

Code of Conduct relating to human rights

Code of Conduct relating to environmental protection

Code of Conduct relating to sustainability

Code of Conduct relating to conflicts of interest

13

Companies (out of 21)


15

8

9

12

2

2

9

9

9

7

Results PSI20 + 1

62%

71%

38%

43%

57%

9,5%

9,5%

43%

43%

43%

33%




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Based on these results, we can therefore state that:

Self regulation of PSI120 listed companies is a

growing reality, with more than 50% of companiesshowing evidence of practices of this nature However, the transition from Mission and Values

to Codes of Conduct was only achieved by ninecompanies Only two companies have internal codes which

regulate public lobbying activities, and only twodeal with sexual harassment in their codes. Sevencompanies have codes concerning conflicts ofinterest In Portugal, the CMVM recommends the

existence of whistle blowing procedures, and 14companies comply with this recommendation

The standards that regulate the behaviour of the entireorganisation serve as a benchmark for employees asto what is acceptable and unacceptable behaviour,given the reality, culture and history of the company.Self regulation is a factor which has been encouragedby regulators and is valued by most stakeholders,supporting any strategy which is focused on theprinciples of sustainable development and company

social responsibility.


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4.STAKEHOLDERS EXPECTATIONS AND THEIRINTEGRATION INTO GOVERNANCE MODELS

not only financial but also non financial information totheir shareholders, which answers the needs of thoseshareholders who are concerned about sustainabledevelopment values and the long term market viability ofthe company.

For this, companies have to ensure the following: The Board of Directors must take on formal

responsibility for the management of the expectationsof stakeholders and society, responding to the factorsthat influence the sustainable development of theorganisation and society; A Governance Model mustbe developed, which separates and differentiatesexecutive management from the supervision of areasrelated to Sustainable Development;

A sustainability strategy must be built and

integrated into business strategy, which meetsthe profitability needs of shareholders and theirexpectations concerning the companys relationship

with other stakeholders, in order to guarantee alicense to operate in the short and long term;

An organisational structure has to be implemented,

which allows:- A commitment to Sustainable Development to bemade across the entire organization;- Relevant stakeholders to be involved andinfluenced;- Results to be measured and evaluated

Results to be independently communicated byexecutive management to Non Executive BoardDirectors who have responsibility for challenging

4.1. IMPLICATIONS FORGOVERNANCE MODELS

Responding to stakeholders means a change in theway that companies do business, forcing top Boardmanagement to adopt new Governance models, designed

to respond to stakeholders who impact or are impactedby its activities through actions and results.

This implies abandoning the Shareholder Model theoryand adopting a realistic, efficient and practical model,focused on value creation, not only in the short but alsoin the long term.

In practice, no company has all stakeholders representedon its Board of Directors, nor has objectives which satisfysimultaneously all relevant stakeholders of the company.

Under current market conditions, this means that theimplementation of a stakeholder model in its theoreticalform is not viable.

Thus, companies which are investing in sustainabilityin a consistent manner have adopted GovernanceModels, which meet the short term profitability needsof shareholders, but at the same time always take intoaccount their licence to operate and future profitability.The Enlightened shareholder model is in theory thebest practical response of organisations, which havedecided to invest in sustainability. With this model, theycan respond to the expectations of all stakeholders bydemonstrating practices and results, while presenting


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In addition to meticulously complying with the mainguidelines of the regulatory entities, which are equivalentto the SAM variables/ shareholder analysed in section 2,

they also have characteristics, which would place themin the group of organisations that fit within the scope ofthe enlightened shareholder and stakeholder theoreticalmodels.

executive management;The company must have a setof standards and a self regulatory framework. Thismeans that the organization has to be made aware of

the need to invest in new practices and ways of doingthings, which are ethical, responsible and in line withthe requirements of society;

Procedures must be implemented to ensure

compliance with the ethical standards adopted;

Consistent reporting procedures must be provided

for relevant stakeholders.

Mechanisms must be created to promote

transparency with shareholders in order to respondto non financial expectations about companymanagement, which will allow a license to operate tobe granted to the organization in the long term.

4.2. EXAMPLES OF THEINTEGRATION OF STAKEHOLDEREXPECTATIONS INTO

GOVERNANCE MODELS

Over the last decade, concerns about sustainabilityamong companies have increased, which has also led toan increase in their investment on issues related to CSR.The Dow Jones Sustainability Index is an opportunityfor companies to differentiate themselves. In fact, theDJSI considers sustainability as a business model thatallows companies, which take economic, social, and

environmental risks and opportunities into considerationin their management decisions, to be identified.

We describe below some examples of the inclusion ofthe expectations of shareholders and of stakeholdersin the governance models of companies in the banking,construction and retail sectors. These companies areconsidered to be worldwide leaders in sustainabilityamong their competitors in terms of the implementationof sustainability within their organisations. (they havealso been singled out as leaders in sustainability

2007/2008 in the The Sustainability Yearbook 2008, SAMand PriceWaterHouseCoopers).

4.3. EXAMPLES IN THE BANKINGSECTOR

The Australia and New Zealand Bank (ANZ): an exampleof a multi-disciplinary organizational structure.

The governance structure of this bank has all thecharacteristics of a one tier board of directors and theAnglo Saxon board model. The main feature supportingthis statement is the fact that a single board entityexists, elected by the shareholders general meeting.

The Board of Directors (BoD) in their turn has delegatedthe authority and responsibility for the day to daymanagement of the bank to the CEO (who is a memberof the Board of Directors) and through him to otherexecutives (these directors and the CEO make up theExecutive Board of Directors(EBD)).

There are 5 Board of Directors Committees, made uponly of independent directors, to which the BoD hasdelegated powers and responsibilities in the followingareas: Audit, Governance, Human Resources, Risk andTechnology.


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* The People Charter wil be launched 2008

ANZBoard of DIrectors

GovernanceCommittee

CEO &Management Board

CustomerCharter

ShareholderCharter

PeopleCharter*

CommunityCharter

EnvironmentCharter

Group GeneralManager

Corporate Affairs

CorporateResponsability

Council

Source: ANZ - CSR Report 2007.

The SCRB was set up together with the Corporate SocialResponsibility Charters, aimed at the main stakeholdersof the bank:

Customer Charter;

Shareholder Charter;

People Charter;

Environmental Charter;

Community Charter.

The strategic priorities and objectives, the commitmentsand governance structure responsible for itsimplementation are defined in these Charters. Thus,the bank seeks to meet the expectations and prioritiesof its strategic stakeholders, integrating them into itsbusiness model.

The BoD, based on an exercise undertaken to identifyand consult with strategic stakeholders, concluded thatissues related to sustainability and stakeholder dialoguewere extremely important for the banks performance. Itthus set up:

The Social Corporate Responsibility Board (SCRB),

with supervisory and advisory duties. It is made upof executive directors and led by the Chief FinancialOfficer (CFO). The formal responsibilities of this boardare:

- Identifying and following up on sustainability risksand opportunities;- Informing and advising the BoD with the aimof providing a better response to these risks andopportunities;- Defining targets and commitments in thesustainability area, in conjunction with theExecutive Board of Directors (EBD);- Integrating sustainable management policies andsystems throughout the company;- Evaluating and approving all significantcosts necessary for the implementation of the

sustainability strategy.

4.STAKEHOLDERS EXPECTATIONS AND THEIR INTEGRATIONINTO GOVERNANCE MODELS


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Westpac and the integration of sustainability at the

Board of Directors level

The governance structure of this bank is similar to theprevious bank (ANZ) in respect of the model and boardsystem (Anglo Saxon and one tier respectively).

The major difference is in terms of Board committees, inparticular the existence of a Sustainability Committee atthe highest governance level.

This is of great importance, since it implies that theintegration of sustainability into the business model issomething that adds value to the shareholder (a typical

feature of the enlightened shareholder model).

For this integration to take place in an effective manner,specific governance structures have to be set up andstrategic shareholders consulted.

Source: http://www.westpac.com.au/docs/pdf/aw/WAR2009_CorporateGovernance.pdf [25/01/10]

The Board:. formally delegates part of its functions to its Committees and tomanagement via formal Board and Committee charters.

. delegates specific authority to the CEO and specific managers viadelegations of authority.. retains accountability and receives assurance through Committeereporting structures, approved policies and management reportingstructures. The Board directly retains responsability for:

. providing strategic direction;

. CEO succession and appointment;

. budget setting and monitoring;

. determining dividend policy;

. approval of our risk management strategy and frameworks;

. approval of items on the recommendation of its Committees;

. appointing of and relationship with external auditors;

. determinations concerning our capital structure;

. monitoring compliance with sustainability policies;

. relationships with the exchanges and regulators; and

. internal governance.

Key functions:. Social, environmentaland ethical impact ofWestpacs activities. Oversee intiatives toenhance Westpacssustainability. Set standards forcorporate responsabilityand monitor compliance

Relevant policies:

. Principles for DoingBusiness. Code of conduct. Whistle blowing

Key functions:. Integrity of financialstatements & financialreporting systems. Appointment of ExternalAudit. External auditorperformance,qualifications andindependence. Internal audit functions. Compliance with

financial reportingand related regulatoryrequirements

Relevant policies:. Sarbanes Oxley controlframework. CEO/CFO certificationprocess. Non-audit services

Key functions:. General renumerationpratices. Executiveremuneration policy. Non Executive Directorremuneration. Group Executivecontracts. Equity based plans

Relevant policies:. Executive and Directorshareholding guidelines. Subsidiaryremunerationsframework

Key functions:. Board composition,size. Board performancereview. Director Induction andongoing education. Director appointmentand succession. Corporate governance

Relevant policies:. Director independence. Director tenure. Subsidiary Boardcomposition principles. Fit and Proper Policy. Board renewal policy

Key functions:. Review and approverisk managementframeworks. Oversee effective riskmonitoring. Monitor that riskpolicies are in plece tosupport frameworks. Approve limits andconditions that apply totaking of risk. Review significantissues raised by internalaudit

Relevant policies:. Risk frameworks -credit, market andliquidity, operational. Business continuity/disaster recovery. Insider trading. Conflicts policies. Regulator contact

. External auditors

. Group Assurance

. Group Secretary andGeneral Counsel. Ability to accessindependent legal orother professionaladvice

Provideassurance on

risk componentsof financialstatements

The Executive Office, Disclosure Committee and Executive Risk Committees sit beneaththe Board and its Committees to

implement Board approved strategies, policies and management of risk across the Group.

IndependentAssurance

Board

Chief ExecutiveOfficer

Remuneration Nominations RiskManagement

Audit Sustainability

Delegation

Assurance

BoardCommittees

WESTPAC GOVERNANCE FRAMEWORK


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representatives from strategic stakeholders. Theserepresentatives are asked what the priorities are inrelation to sustainability for the banking industry and for

the community. Westpac collects this information andresponds to it.

Also, much of what is reported in sustainability reportscomes from guidelines given by this council.

It was with this in mind that the Sustainability Committeewas set up (led by a non executive independent directorand of which the CEO and another independent directors

are members), and it has functions that are similar in allrespects to the CRSC of the ANZ.

As a privileged source of information for strategicdecision making, this committee has available a meansof relating to stakeholders, the highlight of which is theexistence of a Community Consultative Council.

The council is chaired by the CEO and includes high level

Government &Regulators

Consumers

Community &NGOs

EXTERNAL ENVIRONMENT

WITHIN THE BUSINESS

CommunityConsultative

Council

Executive OfficeBusiness Units

CorporateResponsability& Sustainability

Team

Agendasetting andgovernance

Seekingresponsible

business outcome

Building aresponsible

business

Board CorporateResponsibility

& SustainabilityCommittee

Supplier Forum

Employeenetworks

EnvironmentalAdvisory

Group

Social AdvisoryGroup

Source: http://www.westpac.com.au/about-westpac/sustainability-and-community/our-approach/stakeholder-engagement/ [25/01/10]


WESTPAC STAKEHOLDER ENGAGEMENT FRAMEWORK


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Deutsche Bankand the practical application of the

stakeholder model in the German model and two tier

system

The governance structure of this bank has all thefeatures of a two tier board system and the GermanBoard model. The distinctive feature, which places it inthese two groups, is the fact that a dual board structureexists, made up of a General Supervisory Board (GSB)and an Executive Board of Directors (EBD).

The members of the GSB are elected by shareholders attheir general meeting and by employee representatives(currently it is made up of 20 members, 9 of whomwere elected by the employee representatives) and itsfunctions are to:

Nominate members of the EBD; Supervise and evaluate the performance of the

EBD; Advise the EBD, being directly involved in all

issues of strategic importance to the bank.

The GSB has established five committees with specificresponsibilities. The presence of members on almostall of them, who are elected by the employeesrepresentatives, should be noted:

Chairmans Committee: Responsible for all EBDand GSB subjects, made up of 4 members, 1 ofthem elected by the employees representatives; Nominations Committee: Prepares and proposes

shareholders representatives for the GSB, madeup of 3 members elected by the shareholders; Audit Committee: Responsible for all financial

audits and for discussion of audit reports with theindependent external auditor. It is made up of 6

members, 3 of whom are elected by the employeerepresentatives;

Risk Committee: Responsible for the evaluationof loans, which require an opinion from theGSB, and made up of 3 members elected by theshareholders; Mediation committee: Mandatory by German

law, it has the job of making proposals to the CGSfor the nomination or dismissal of members of theEBD in situations where the GSB cannot reach adecision by a majority of two thirds. It is made upof 4 members, 2 of which are elected by workersrepresentatives.

Based on the above evidence, the integration ofemployees into the banks governance model at thevery highest level and with an influence over strategy is

apparent.

EnvironmentalSteering

Committee

Marketopportunitiesand voluntary

obligations

GroupReputational

Risk Committee

CorporateGovernance

Management BoardResponsible for

sustainability issues

Group Sustainability

SustainabilityManagement

System

Coporate &Investment

Bank

Private Clients& Asset

Management

Stakeholders of Deutsche BankShareholders, clients, employees, society

SUSTAINABILITY MANAGEMENT SYSTEM: CONTROL AND FUNCTIONS

Source: Deutsche Bank - CSR Report 2008

Despite the big differences in the top managementmodels of the two banks described above, DeutscheBank (DB) has also integrated sustainability into itsgovernance, basing its strategy on stakeholder dialogue.

Based on the issues identified through this dialogue, theDB implemented its Sustainability Management System,for which the EBD has the maximum responsibility.

It should also be noted that two inter-departmentalcommittees exist with responsibilities in relation tostrategy development and coordination of initiatives.

A final point is that all these banks have formal codesand policies covering all relevant sustainability issues,which must be followed by all employees.


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and other non executive independent board directors aremembers of this committee. The CEO is also present atmeetings as the executive responsible for the necessary

procedures to correctly implement the policies andcodes.

HOCHTIEF and the Social Corporate Responsibility

Steering Committee

This company has a German governance model, verysimilar to that of the Deutsche Bank. The integrationof sustainability into the governance of the companyis achieved firstly by the set up of an Environmental,Health and Safety System. The responsibility for theimplementation of this system is with a Centre whichbrings together employees from various divisions of thecompany (the Centre for Occupational Health and Safetyand for the Environment, the OSHEP Centre).

In order to increase the level of integration ofSustainability into the governance model, a SocialResponsibility Steering Committee was set up,members of which are the Board Director responsiblefor Corporate Social Responsibility, the OSHEP Centre,employee representatives and other departments.

4.4. EXAMPLES IN THE

CONSTRUCTION SECTOR

Balfour Beatty and the importance of policies and codes

of conduct

This British construction company has a governancemodel which is very similar to ANZ and Westpac.

The fundamental values of this company are: Integrity Always do what is right;

Team work Add value working together; Excellence Seeking to exceed customers

expectations; Respect The importance of community

involvement.

These values are put into practice through a set of formaldocuments applicable to all employees and activities ofthe company. Major highlights are:

Code of Conduct guidelines which explain to

employees how they should act, and which arebased on the principles of sustainability;

Stakeholder codes which define the keyprinciples and minimum requirements for relationswith employees, customers, suppliers and societyin general.

The policies, which define the requirements

applicable to all business operations of thecompany, are:

- Risk Management;- Health and Safety;- Environment;

- Human rights;- Drugs and alcohol;- Equal opportunities;- Whistle blowing;

Against this global and wide ranging framework, thedifferent subsidiaries of the company must developpolicies and practices specifically adapted to theirparticular circumstances.

The Board of Directors has the highest level ofresponsibility for all of these policies, and a Business

Practices committee has been set up to oversee thisspecific area. The Chairman of the Board of Directors

CSR organization

HOCHTIEF Executive Board

Strategy Recommendations

Information exchange, workinggroups and controlling

CSR Committee:Executive Board member responsible for CSR,

CSR coordinator, representatives from the OSHEPCenter, the Works Council, the Service Center,representatives from Corporate Centers of Suply

Management, Controlling, Finance (InvestorRelations), Human Resources, Legal (Corporate

Governance), Corporate Communications, CorporateDevelopment

Corporate divisions/operational corporate units

Source: Hochtief Sustainability Report, 2007



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4.5. EXAMPLES IN THE

DISTRIBUTION SECTOR

J.Sainsbury, an example of sustainability governance

that separates the execution from the supervision of

sustainability in a clear and efficient manner

J.Sainsbury is a UK retail company. As a leader in theDJSI ranking in the Food and Drug Retailers sector,Sainsbury is an outstanding example in its understandingof the double function of the Board of Directors, i.e.

the execution and the supervision of the sustainabilityagenda.

CR steering groupEstablished 2001, Meets quaterlyJustin King, Chair, Chief Executive

Best for food and healthGwyn Burr, Customer Director

Sourcing with integrityMike Coupe, Trading Director

Respect for our environmentLawrence Christensen, Non-Executive ChairEnvironment, Food Safety and H&S

Making a positive difference to our communityRoger Burnley, Retail and Logistics Director

A great place to workImelda Walsh, Human Resources Director

HealthSteering Group

Brand GovernanceSteering Group

EnvironmentSteering Group

CommunitySteering Group

A Great Place to WorkSteering Group

CR committeeEstablished January 2007Meets twice annually

Anna Ford, ChairNon-Executive Director

J Sainsburyplc Board

Philip Hampton,Chairman

The Governance model includes a specialist committeeof the Board of Directors, led by a Non ExecutiveDirector, who supervises the work of the Executive

Directors in the sustainability area. It reports directly tothe Chairman of the Board of Directors.

The company also has an organisational structure forthe day to day execution of sustainability actions, whichis a steering committee responsible for formulating andexecuting planned sustainability actions and objectives.

This committee is led by the CEO of the companyand is made up of managers with responsibilities foreach strategic priority of the company. Each of thesemanagers also operationally leads work groups, whichexecute and control each strategic cornerstone of the

Source: http://www.j-sainsbury.co.uk/cr/index.asp?pageid=21 [25/01/10]

company. In this way, the company meets the need tobuild a multi-disciplinary model which cuts across theentire organisation.

Sainsbury is also exemplary in demonstrating howit applies the corporate values that it has adoptedin its governance structure. Each representative ofthe Steering Committee is responsible for managingand implementing these values through specific and

measurable actions.

This sustainability governance model involves the people

with the most responsibility for the management andsupervision of the company, making a clear distinctionbetween those who manage and those who supervise,putting the CEO and leader of the company in the frontline for the execution of the sustainability strategy.

With this model, Sainsbury has managed to achieveresults and earned visibility by becoming the DJSIleader in 2008, in direct competition with the biggest

retail operators in the world, providing proof ofthe effectiveness of the companys sustainabilityperformance.

SAINSBURY GOVERNANCE FRAMEWORK


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The Executive Committee reviews this area with theSustainable Development Department, which has the

responsibility to communicate the strategy definedby the Board of Directors to all countries in which thecountry operates. Also at Group level, the departmentis responsible for meeting and reviewing with all Groupdepartments, which have responsibilities for actionsconnected with the sustainability strategy.The Sustainability Department has a representativein each country and in each store. This representativecoordinates with store and department managersthe implementation, adaptation and development ofspecific local objectives, which result from the generalguidelines decided upon by the Board of Directors.

Carrefour sustainability in the core business means

sustainability at the Board of Directors level.

Carrefour is the biggest European retailer and thesecond biggest in the world. This global giant is one ofthe companies in the DJSI with the highest rankings insustainability investment.

In relation to the supervision and execution ofsustainability, Carrefour does not separate this areafrom any other, preferring not to focus its supervisionexclusively on a specialist committee of the Board ofDirectors. Carrefour believes that the link betweensustainability strategy and business strategy shouldbe seamless and thus sustainability matters shouldbe supervised and discussed both by the ExecutiveCommittee and by the Board of Directors.

ORGANISING SUSTAINABLE DEVELOPMENT INITIATIVES INVOLVES ALL ACTIVITIES

Impetus advice

management

GROUP

COUNTRY

BUSINESSUNITS

Scientificand expert

committees/media

Sustainable Developmentnetwork Cross-departmental networks Store

SD Department

Country SD

Banner SD

Store

European Public Affairs Quality/Merchandise Human Resources Assets Logistics



Implementation

Source: http://www.carrefour.com/cdc/responsible-commerce/our-organization-and-policy/

Cooperativeexchange

ReportingConsulting

the level of each store of the Group, thus ensuringthe cross company impact necessary for the effectiveimplementation of sustainability.

The company thus communicates the principles, policiesand actions decided upon concerning sustainabilityacross the entire organisation.

With this Sustainability Governance model, the company

puts the Sustainable Development Department in aposition to play a pivotal role at a corporate level, andat the management level of each country and even at


CARREFOUR SUSTAINABLE DEVELOPMENT ORGANIZATION AND POLICY


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5.FINAL THOUGHTSAND REFLECTIONS

with highly fragmented share capitals.

In Portugal, and due to its history, culture and open

market economy which has developed only relativelyrecently, many PS120 listed companies still have strongfamily structures and so their share capital is notdistributed among so many shareholders. Given thisreality in Portugal, it is not surprising that governancepractices of Portuguese companies are so different fromthose considered as good international practices. Thiscould also signify that those PSI20 companies, which seekto become part of the DJSI, would have to significantlychange their governance systems. It is for this reasonthat PT and EDP are two companies which have a numberof practices that can be considered as good governance(in spite of the ever polemical question of the GoldenShare(6)), with both of the these companies having theirshare capital distributed among a very large number ofshareholders. These good governance practices alsocover issues related to sustainability. However, if theshare capital of companies is in the hands of only one ortwo shareholders, this does not necessarily mean thatthey cannot have good sustainability practices. Ratherit signifies that their governance practices, one of thecornerstones of sustainability, will not measure up toscrutiny according to existing international criteria.It is possible that these companies have good socialand environmental practices, which meet societys

expectations.The pressure to change the governance cornerstonemay arise if society begins to believe that minorityshareholders should have more power in the decisionmaking process, if the company wants to increasethe fragmentation of share ownership in financialmarkets or if it wishes to become part of internationalinvestment fund portfolios. Regardless of the culturaldifferences between Portugal and other European andAmerican countries, it is possible to find evidence thatPSI20 companies are integrating sustainability intotheir governance models. Despite the fact that 57% of

PSI20 companies state that they have a Sustainabilitystrategy, only 43% recognise the Board of Directors asformally responsible for its management. And only 29%state in publicly disclosed documents that they have aSustainability Committee, whereas in the DJSI this figurereaches 44%. This lack of direct involvement by theBoard of Directors would explain the fact that only 33%of companies have a code of conduct relating to conflictsof interest and only 10% (2 companies) have codes ofconduct for public lobbying and sexual harassment.Only 43% have an ethics code. These figures

Enlightened Shareholder Model

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