Responsible ownership
Erik Breen
Presentation for VBAApril 29th, 2008
Statement 1
Responsible ownership is a hype and will pass by
Abstain AgainstFor
Statement 2
Only large pension funds (over 15 billion euro) can fill in their responsible ownership
Abstain AgainstFor
7 februari 2007 4
Context and agenda
Clients and society ask for responsible ownership– Hype or trend?
Institutional investors have to have a response– Building your own policy or use international codes?– Which instruments are available for implementation?
Engagement led divestment– Elaboration of the latest innovations
Conclusion
7 februari 2007 5
What is responsible ownership?
“The choice of a common stock is a single act, its ownership is a continuing process. Certainly there is just as much reason to exercise care and judgment in being a shareholder as in becoming one.”
B. Graham and D. Dodd, Security Analysis, 1st Ed.
(McGraw Hill, 1934) at p. 508.
7 februari 2007 6
Individuals become more critical and call for accountability from companies, pension funds and asset managers
Trust ofbenefical
owner
Accountability and transparency from company or investor
Trust me
Join me
Involve meShow me
Tell me
7 februari 2007 7
The call for responsible behavior is a trend
Growing, long term trends
– Scarcity of natural resources
– Population and global wealth
– Impact of international NGO’s
– Spread of information
– Awareness and demands from individuals
– Globalisation and increasing power of companies
– Transparency and accountability of companies
Building a response as institutional investor
7 februari 2007 9
Choices to be made …
How to define norms and values– From external codes of conduct– From “internal” shared values– Blend of external and “internal”
Which instruments to use– Universe selection
– Exclusion (negative selection)– Best in Class (positive selection– Positive theme products
– Integration in buy and sell decision – Ownership responsibilities
– Voting– Engagement (active dialogue)
The end determines the means
7 februari 2007 10
Options in defining norms and values
Advantages and disadvantages
External, independent reference
General and overarching principles
Fits heterogeneous party Easier to adopt Application often requires
interpretation and analysis
External values and norms “Internal” values and norms
Advantages and disadvantages
Can be challenged on its grounds
Tailor made and well carved out
Fits specific homogeneous party
Takes more time to develop Clarity may advance straight
forward application
7 februari 2007 11
Options in defining norms and values
UN Principles for Responsible Investment (www.unpri.org) UN Global Compact based on:
(www.unglobalcompact.org) Universal Declaration of Human Rights
(www.udhr.org) ILO’s Declaration on Fundamental (www.ilo.org)
Principles and Rights at Work Rio Declaration on Environment and (www.un.org)
Development UN Convention against Corruption (www.un.org)
Global Reporting Initiative (transparency)(www.globalreporting.org)
International Corporate Governance Network (www.icgn.org)
Code Tabaksblat(www.commissietabaksblat.nl)
Ethical Guidelines for the Government Pension (www.regjeringen.no/en.html)Fund (from Norway’s Ministry of Finance)
Often used external codes of conduct and external references
Available instruments to implement a responsible policy
7 februari 2007 13
How can investors influence companies?
Through legal rights …– Voting rights– Class actions
… and other practices …– Private dialogues– Public statements – Shareholder coalitions– Buy and sell– Exclusions
… on numerous topics– Corporate governance– Social and environmental– Strategy and capital structure
7 februari 2007 14
Exclusions and Best in Class Aimed to avoid and keep clean hands
Exclusion of non-responsible companies Shift in risk-return profile compared to conventional investing No direct impact, especially not on more controversial companies
Can I have a portfolio with securities of responsible companies?
Clean hands or feet in the mud ?
Voting and engagement Aimed to improve behaviour hands on
No exclusions Comparable risk-return profile compared to conventional
investing Direct impact, also on more controversial companies
Can I have a responsible effect on the companies in my portfolio?
7 februari 2007 15
Impact No investments No investments Vote against Active dialogue to in your products in your behavior management improve behavior
Investor passive passive re-active pro-activeCompany passive active ? avoidance ? interactive
Common tobacco, arms, environment, voting policy external codescriteria alcohol, etc. society and of conduct and
human rights value creation
Means and niche capital niche capital main stream potentiallyresources (limited) (limited) (extensive) main stream
(extensive)
(minimal)Exclusions Best in Class Voting Engagement
Engagement is most effective to aim for more responsible behavior
Restricting investment opportunities No restrictions upfront
Exclusions and best in class
7 februari 2007 17
An exclusion policy is often product related rather than company behavior related
Feasible policy
Elaborated policy
Feasibility and implementation
Concept policy
Reach and consequences
Impact on investment
process
Impact assessment
External impuls
7 februari 2007 18
Best in class universe
NO Unacceptable PreferredBest in Class
Negative or positive selection restrict the investment universe
Voting your shares
7 februari 2007 20
Institutional investors have to apply transparency or explain
Best practices will be effectuated by law from January 1st, 2007
– Institutions publish voting policy– Institutions report on execution– Institutions publish voting records
Underlying principle– Institutional investors make a careful
and transparent judgment whether or not they will use their voting rights.
7 februari 2007 21
Voting is concentrated in the second quarter
– Robeco votes at 1,200 AGM’s a year, mostly handled electronically
– About two third of these meetings are held in the second quarter
– In a top week 120 meetings are held
– Off season there are around 5 to 15 meetings a week
Number of shareholder meetings per week at which Robeco has cast its vote in 2007
0
20
40
60
80
100
120
140
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 21 22 23 24 25 26 27 28 29 3 31 32 33 34 35 36 37 38 39 4 41 42 43 44 45 46 47 48 49 5 51 52
Week number
Num
ber o
f sha
reho
lder
mee
tings
7 februari 2007 22
Independency of Dutch board committees has increased significantly
Source: RiskMetrics Group
7 februari 2007 23
Voting on sustainability issues occurs seldom outside the United States
– Robeco voted in 2007 on 100 agenda item abouts sustainability– In 63 cases Robeco voted against management recommendation– In 84 cases it concerned a meeting in North America
Aantal vergaderingen met "duurzame" agendapunten
0
10
20
30
40
50
60
70
80
USA
Canada
Berm
uda
United K
ingdom
Finlan
d
Denmar
k
Sweden
Irelan
d
Japa
n
Singap
ore
Hong K
ong
Number of meetings with “sustainable” agenda items
7 februari 2007 24
Money starts talking
Voting is more and more used to influence decision making.
Reasoning for votes against management proposals are more often explained.
Selling is no longer the only option an institutional investor has.
Having a continued, constructive dialogue is seen as the way forward.
Engagement aims to influence company behavior
7 februari 2007 26
• Engagement is an approach which investors practice to actively influence companies to optimize the balance between profit, socially and environmental effects.
• The aim is to enhance long term shareholder value creation.
– toeleveranciers– locatie van vestiging– ….
– werknemers– klanten– milieu– overheid
Bedrijf
Invloed op beslissingen
Omgeving
Information
Company
Influence on decision
Shareholder
employees customers environment government
suppliers local community ….
Stakeholders
Engagement means an active, constructive dialogue with companies
7 februari 2007 27
$InvestmentPortfolio %Company’s
willingness
»Value creation
and risk
mitigation ▲Company’s ability
Changethroughdialogue
Effective engagement deals with significant subjects
7 februari 2007 28
Each phase requires a different, well considered choice of communication methods
Fact finding mission– Factual questions– Strictly business, no emotions– Usually by e-mail
Opening a constructive dialogue– More challenging questions– Discussing arguments for different scenarios in
a consultancy role– Preferably face to face
Influencing opposing opinions– More directive with clear statements, views
and arguments– Sharp on content, soft on tone of voice– Different channels including AGM and media
7 februari 2007 29
Reputation Risk
Low High
Hig
h im
pact
Private Collective with large institutes
Collective with all
shareholders
In public,through media
Low
im
pact
Management
meeting
Companyvisit
Letter and
e-mailsTelephon
ecall Attend
AGM / EGM
Speaking jointly at
AGM / EGM
Give press
quote
Specific site visit
Joint openletter
Open letter
Jointletter
Speak atAGM /
EGM
Speak onconferenc
es
Jointly call an EGMArrange a
joint sharehold
erresolution
Active voting
plus report
Management
meeting
Joint meetingwith
management
Issue press
release
Costs
HighLow
Appropriate communication is crucial for effective change
7 februari 2007 30
Our engagement process has twenty steps and addresses –among others - the following:
Which company or companies?
Led by occasion, theme or plan?
Including peers on similar topics
Directed theme research (outsourced) and company analysis
Final go or no go decision
Which objective and strategy?
Measurable objective (SMART)
Strategy (incl. communication)
Relation check Shareholder base
Establish contact Inform internal key persons Establish contact and
relations Give context and verify facts
with the target company
Dialogue Constructive dialogue
based on facts and arguments
Evaluation of responses
Declare success or failure based on the objective. Close case for report.Choose to follow up (optional) or give divestment advice (optional)
7 februari 2007 31
Necessary conditions for successful engagement
Large pension funds and independent asset managers are well positioned to practise engagement successfully
– Size creates access (voice can only create access in consumer stock)
– Independence avoids conflicts of interest
– Knowledge creates a level playing field
– Resources to deal with the workload
Pieces falling together in the latest innovation:
Engagement led divestment
7 februari 2007 33
Summary of proposed steps
Step 1 Client defines its policy statement
Step 2 Service provider identifies key indicators per industry. The key indicators
are linked to the client’s policy statement, which is also used to define a
minimum acceptable levels in order to measure progress.
Step 3 Service provider engages with a selection of companies and measures
the progress of companies under engagement according to key indicators
Step 4 Service providers advises client to exclude companies that show lack of
progress on the key indicators and fail to meet the pre-defined minimum
acceptable levels
Step 5 Apart from the interaction between the client’s policy and predefined set of
key indicators attributed per sector, there is room to choose one or two
topical themes per year which will follow a similar process
Policy Engage Indicators & Criteria
Possible exclusion
Assess progress
7 februari 2007 34
The proposed process step by step
Step 1 Client defines its policy statement
Choices 1. Content
2. Level of detail
3. Level of reach and impact
Example on level of detail
“Encourage companies to respect human rights”
“Companies should not make use of child labor”
Example on level of reach and impact
“Companies should not make use of child labor”
“No investments in companies that structurally use forced labor in their
production or in the production of their supply chain”
Policy
7 februari 2007 35
The proposed process step by step
Step 2 Service provider identifies key indicators per industry. The key indicatorsare linked to the client’s policy statement, which is also used to define aminimum acceptable level in order to measure progress.
Example given:
Policy Indicators & Criteria
Key indicators per industry per topic
Environmental Ethics Social
Eco-efficiency Project Finance …. Land mines …. ….
Aerospace & Defense
Emissions during plane's life time - End producer
Strategic parts
Reseller
Auto manufactures
Emissions during car's life time -
Solvents used in manufacturing -
Banking -Equator principles
Building & Construction ISO 14001
…. EMAS
7 februari 2007 36
The proposed process step by step
Step 3 Service provider engages with a selection of companies and measuresthe progress of companies under engagement according to key
indicators
Choices - Prioritization of key indicators and industries in discussion with the client
- Engagement on key indicators over all industries is realized over years
- As a result over time all key aspects of all industries are covered in a very
structural approach
Policy Engage Indicators & Criteria
7 februari 2007 37
The proposed process step by step
Policy Engage Indicators & Criteria
Possible exclusion
Assess progress
Step 4 Service provider advises the client to exclude companies that show lack of and 5 progress on the severe, key indicators and fail to meet the pre-defined
minimum acceptable levels
Nature The advice includes: of 1) the actual company behaviour;advice 2) indications of the company’s (un)willingness to adjust this specific
behaviour and;3) the judgement of this behaviour under application of the client’s policy and with respect to external, internationally accepted principles such as the UN Global Compact, its subcomponents and where relevant (interpretations of) other codes of conduct as adopted by the Dutch government.
The client decides on the advised exclusion and orders implementation
Possible developments in mainstreaming responsible investments
7 februari 2007 39
Possible development of mainstreaming responsible investments
Core Theme
Ethical
Responsible
Return only Traditionalequity
portfolio
Responsible equity
portfolio
Themefunds
Theme funds
Minimal exclusionsVoting and
engagementled divestment
Best in classfunds
7 februari 2007 40
Questions?
Contact details: [email protected]
APPENDICES
APPENDIX 1Collaboration of institutional investors
About fellow shareholders in the same game
7 februari 2007 44
Power - Bundled voting power Effectiveness - One voice with one message Efficiency - Sharing work load Balance - Adding arguments and challenging views Continuity - Longer term relationship
Collaboration between fellow shareholders makes sense
Institutional investors recognize they are all fellow shareholders
Arguments count, but there is a lot more to it:
The balance of arguments The tone of voice The required timelines The communication method used The history of the relationship
Support of arguments but no association
Institutional investors safeguard their own identity
Institutional investors become more active and see their powers enhanced
7 februari 2007 45
Examples of existing investor networks
– Eumedion - Dutch governance network with foreign members as well
– GIGN - International governance network
– UN PRI - Clearing house for engagement cases
– CDP - Widely supported call for more transparency on emissions
– EITI - Call for transparency on bribery & corruption in mining sector
– Eurosif - European network of social investment forums (Dutch: VBDO)
– EAI - Call for more research on extra financial issues
– On occasions on a case by case basis
APPENDIX 2Real life examples
About Royal Dutch Shell, VNU, CSM, Euronext, Stork and ABN AMRO …
7 februari 2007 47
Story telling and questions
– Royal Dutch Shell - Reserve scandal, accountability and unification
– VNU - Buying IMS Health and selling to private equity
– CSM - Fat balance sheet, new strategy and new CEO
– Euronext - Strategic options and the European identity
– Stork - Public to private and focus on Aerospace
– ABN AMRO - Buying 1% and writing a letter
7 februari 2007 48
Why would investors influence companies?
Responsibility as owner– Obligation of having power
Identity as investor– Labour organisations, churches
General value perspective– Universal owner– In general and in precedents
Focused value strategy– Strong aligned with investments– Strategic consultancy “offered”
APPENDIX 3Voting
7 februari 2007 50
Corporate governance is important and will evenbecome more important
Answers by 322 institutional investors from 2006 ISS Global Institutional Investor Study
"What is the overall
importance to your firm
of the corporate
governance of portfolio
companies?"“How do you expect your
firm’s views of the
importance of corporate
governance to change
over the next three
years?”
78%
63%
0% 20% 40% 60% 80% 100%
ContinentalEurope (n=59)
Average(n=322)
Significantly orSomewhat More
61%
71%
0% 20% 40% 60% 80% 100%
ContinentalEurope(n=59)
Average(n=322)
Extremely orVery Important
7 februari 2007 51
Compliance, extra return and client demand willdrive the importance of corporate governance
Answers by 322 institutional investors from 2006 ISS Global Institutional Investor Study0%10%20%30%40%50%
Past 3 years
0% 10% 20% 30% 40% 50%
Momentum / Progressiveness
Risk management
Client Demands
Enhanced Investment returns
Focus on compliance
Scandals
Next 3 years
“What factors have driven
change in importance the
most?”
“What factors will drive
change in importance the
most?”
+
+
+
+
-
-
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