Engagement Reporting

Global top

During the third quarter of 2011 EOS continued in its efforts on behalf of Pensioenfonds PNO Media to preserve and enhance long-term value at the companies in which the fund invests. As ever, our work in the quarter covered a wide range of strategic, environmental, social and governance matters, working with companies to address the key risks and challenges that they face. EOS and PNO Media are pleased to report significant progress in engagements with many companies around the world.

The debate regarding alignment in the investment chain has advanced significantly, particularly in the EU. The OECD has opened a project in the area, and its launch document, like the European Commission’s Green Paper on Corporate Governance, referred to the ICGN’s Model Mandate Initiative, which an EOS staff member has been leading. The Model Mandate Initiative advanced significantly in the quarter with approval at the ICGN AGM and consistent interest from a range of global investors. We responded to the EU Green Paper, advocating various important steps to ensure that the system works more effectively in the interests of the asset owners.

EOS and PNO Media were delighted by the feedback statement released by the Financial Reporting Council following its consultation on Effective Company Stewardship. This includes a number of elements that we have been seeking, both through our response to the consultation and in wider discussions with the FRC and other relevant parties. Among other things, the FRC is proposing to implement: a shift to focusing risk reporting on strategic not operational matters; a review of the Turnbull guidance on risk reporting that focuses on the board’s responsibility to carry this forward; better auditor reporting and audit committee reporting; and mandatory audit tendering (on a comply or explain basis). All of these items are ones which we have been seeking through our engagement. The model on greater accounting and auditing reporting by management, audit committees and auditors already seems to be being adopted by the IAASB and the PCAOB, the international and US audit standard-setters.

Africa and the Middle Easttop

EOS advanced engagement on environmental and social risks with several big Russian Oil and Steel companies. We took the opportunity to clarify our approach and objectives, and outline our expectations in terms of shareholder communications. We stressed that an increasing number of institutional investors have strict ESG guidelines for their investment policies and that a failure to manage such issues adequately could lead the company to be seen in negative way, even potentially leading to divestments.

Furthermore, we met with several European and Israeli companies to discuss their operations in the Occupied Territories. Following an encouraging discussion with an Israeli banks, we are now considering engaging with additional local companies on this issue.

EOS and PNO Media also collaborated with other shareholders on a wide range of issues throughout the quarter, We had a discussion with the Employees Provident Fund (EPF) of Malaysia regarding the proposal in the local Securities Commission’s Corporate Governance Blueprint for the creation of a stewardship code for the country. EPF, as the nation’s leading fund, will take a leadership role among institutions in writing such a code and we talked through the experience of developing stewardship codes in various countries around the world. We shared the various existing codes and talked through ways in which this project can most effectively be taken forward.

The Americastop

During the third quarter of 2011, EOS and PNO Media continued our dialogue with major media organisations, making sufficient progress to enable us to withdraw our shareholder proposal in exchange for improved governance and continued access to company directors. We continued our engagement program with the financial services sector, discussing risk, remuneration and regulatory uncertainty with several large Wall Street banks.

We met with a number of oil major’s and we discussed several issues including environmental performance, health, environment and safety governance, shale gas, human rights, and security issues. We have been engaging with these companies over a number of years and took the opportunity to dive deeply into various aspects of the strategy for dealing with such risks. We tested the overall environmental risk management systems and probed for specific examples of how they work in practice.

On public policy, we continue to work as a member of the Canadian Coalition for Good Governance's Public Policy Committee to develop a model policy for new issues of these securities of dual voting shares. We urged the committee to consider further protections for ordinary shareholders in such companies. In particular, we strongly recommended that multiple voting class shares should revert to holding a single vote in an 'Exempt Bid', a low-premium takeover bid to five or fewer shareholders. We also argued that when unwinding a dual class structure, the premium paid to the control group, if any, should be carefully capped. And we noted the need for the draft policy to encompass derivative contracts and note that the shareholders strongly oppose any transaction that would allow a controlling shareholder to monetize all or part of their position through a forward sale while retaining the multiple voting rights attached to these shares.

Asiatop

On public policy work, we responded to a public consultation on amendments to the Code of Corporate Governance, proposed by the Corporate Governance Council. We welcomed all the 15 key proposals, which involved adding additional Code requirements in relation to board practices, remuneration, risk management and shareholder rights, all of which we have been seeking for some time.

EOS and PNO Media welcomed the Singapore Exchange's recently announced amendments to its Listing Manual, effective from the end of September. We particularly welcome the additional requirement for listed companies to disclose the level of fees paid to auditors for both audit and non-audit services, which we have been seeking for several years.
We are pleased that our strong support for this requirement in our response to the public consultation on
the Listing Manual in 2010 has been reflected.

We met with a number of oil major’s in China and we discuss business strategy and sustainability issues. We have also progressed our engagements on Palm Oil and followed up on our engagement on the Carbon Disclosure Project.

Europe ex Netherlandstop

During the third quarter of 2011, EOS and PNO Media continued their engagement with a large German bank, addressing the banks corporate governance and succession planning for the CEO, who has been nominated for election to the supervisory board. We have a number of concerns about the proposal, not least that it may limit his successor's freedom of action, especially given that it arises from inadequate succession planning which will result in what seems to be a compromise co-CEO structure next year. We intend to further this engagement by meeting with several of the current supervisory board members and the chair.

Furthermore, we meet with large European retailers to talk about a range of supply chain issues. Following some negative media coverage in relation to poor working conditions at several suppliers, we tested the audit approach to inspections of working conditions at suppliers' factories. We gained some assurances over the adequacy of these systems, but we stressed the potential bias of using solely an internal audit approach.

Also during this quarter, we wrote to the chairs of the largest German companies which will hold supervisory board elections in 2012. We encouraged them to engage in a dialogue with shareholders ahead of their AGMs and also in advance of the director nomination process in order to gain an understanding of investors' views on the companies’ boards and their needs in terms of mix of skills and other aspects.

On public policy, we participated in a European Commission consultation seeking comments and input on whether and how it should regulate European companies' corporate governance. Given the scope of the consultation and the apparent willingness of some Commission members to regulate in detail as many aspects as possible of the issues at stake, this consultation appears of particular importance for both companies and investors, and it seems likely to impact the international corporate governance debate beyond the EU's borders.

We also spoke at a seminar on responsible investment in the Spanish market. The event focussed on the integration of environmental, social and governance considerations in the investment process, with a number of Spanish asset managers sharing their experiences and challenges. We spoke of the importance of voting and engagement and highlighted our experiences in the Spanish market, noting the vital importance of access to senior management to discuss relevant governance and sustainability issues, as well as the need for better disclosure ahead of general meetings.

The Netherlandstop

EOS and PNO Media engaged with a life sciences and materials company to better understand how it is working to gain a competitive advantage from potential macroeconomic drivers, such as global shifts in demographics and urbanisation, climate change, health and wellness. The company convincingly explained its long-term focus on high growth markets, innovation, sustainability, acquisitions and partnerships.

Alongside other institutional investors, PNO Media and EOS were invited to participate in a meeting of the Dutch Corporate Governance Committee held at the Dutch Ministry of Finance. The purpose of the gathering was to provide input on existing and proposed provisions in the code. The discussion focussed mainly on the role of the investor in terms of voting and engagement behaviour, particularly how investors use the recommendations provided by proxy voting agencies as well how to align the behaviours between asset owners and investment managers. This follows the results of a study conducted by Nyenrode University, during which numerous institutional investors, including EOS, were asked to elaborate on their responsible ownership policies. At the Committee meeting, we highlighted our continued willingness to follow Dutch best practice in our voting and engagement activities and to continue to respond to consultations on enhancements to the Dutch governance arena where possible.

Furthermore, we participated in a meeting of the Investment Committee of Eumedion, to discuss the key topics for the forthcoming voting season in Netherlands. We specifically agreed that the 2012 spearheads letter (which will be sent to the 75 largest Dutch listed companies and to some smaller companies) will be focused on both some recommendations regarding the (re)appointment of the external auditor, and encouragement to improve disclosure on corporate risks.