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Responsible ownership
Erik Breen
Presentation for VBA
April 29th, 2008
Statement 1
Responsible ownership is a hype and will pass by
For
Abstain
Against
Statement 2
Only large pension funds (over 15 billion euro)
can fill in their responsible ownership
For
Abstain
Against
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
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4
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.
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5
Individuals become more critical and call for
accountability from companies, pension funds and
asset managers
Trust of
benefical
owner
Trust me
Tell me
Show me
Join me
Involve me
Accountability and transparency
from company or investor
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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
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Building a response as institutional investor
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
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Options in defining norms and values
External values and norms
Advantages and disadvantages

External, independent reference

General and overarching principles

Fits heterogeneous party

Easier to adopt

Application often requires
interpretation and analysis
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“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
10
Options in defining norms and values
Often used external codes of conduct and external references






UN Principles for Responsible Investment
UN Global Compact based on:

Universal Declaration of Human Rights

ILO’s Declaration on Fundamental
Principles and Rights at Work

Rio Declaration on Environment and
Development

UN Convention against Corruption
Global Reporting Initiative (transparency)
International Corporate Governance Network
Code Tabaksblat
(www.commissietabaksblat.nl)
(www.unpri.org)
(www.unglobalcompact.org)
(www.udhr.org)
(www.ilo.org)
(www.un.org)
(www.un.org)
(www.globalreporting.org)
(www.icgn.org)
Ethical Guidelines for the Government Pension
(www.regjeringen.no/en.html)
Fund (from Norway’s Ministry of Finance)
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Available instruments to implement a
responsible policy
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
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Clean hands or feet in the mud ?
Can I have a portfolio with securities of responsible companies?
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 responsible effect on the companies in my portfolio?
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
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Engagement is most effective to aim for
more responsible behavior
(minimal)
Exclusions
Impact
Investor
Company
No investments
in your products
passive
passive
Best in Class
No investments
in your behavior
Vote against
management
passive
active ?
re-active
avoidance ?
voting policy
Common
criteria
tobacco, arms,
alcohol, etc.
environment,
society and
human rights
Means and
resources
niche capital
(limited)
niche capital
(limited)
Restricting investment opportunities
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Voting
main stream
(extensive)
Engagement
Active dialogue to
improve behavior
pro-active
interactive
external codes
of conduct and
value creation
potentially
main stream
(extensive)
No restrictions upfront
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Exclusions and best in class
An exclusion policy is often product related
rather than company behavior related
External
impuls
Elaborated
policy
Concept
policy
Feasible
policy
Impact
assessment
Reach and
consequences
Feasibility and
implementation
Impact on
investment
process
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Negative or positive selection restrict the
investment
universe
NO
Unacceptable
Best in Class
Preferred
Best in class universe
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Voting your shares
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.
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Voting is concentrated in the second quarter
– Robeco votes at 1,200
Number of shareholder meetingsper week at which Robeco
hascast itsvote in 2007
AGM’s a year, mostly
handled electronically
Number of shareholder meetings
140
– About two third of
120
these meetings are held
in the second quarter
100
80
– In a top week 120
60
meetings are held
40
– Off season there are
20
0
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
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around 5 to 15
meetings a week
21
Independency of Dutch board committees
has increased significantly
Source: RiskMetrics Group
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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
Number
of meetings with
“sustainable”
agenda items
80
70
60
50
40
30
20
10
ng
ap
or
e
Ho
ng
Ko
ng
Si
Ja
pa
n
Ire
la
nd
ar
k
Sw
ed
en
De
nm
nl
an
d
Fi
Un
i
te
d
Ki
ng
do
m
Ca
na
da
Be
rm
ud
a
US
A
0
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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.
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Engagement aims to influence company behavior
Engagement means an active, constructive
dialogue with companies
• 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.
Bedrijf
Information
Invloed op beslissingen
Shareholder
Company
Influence on decision
Omgeving




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Stakeholders
werknemers

suppliers
klanten
–
toeleveranciers
local community
milieu
–
locatie
van vestiging
….
overheid
–
….
employees –
customers –
–
environment
government–
26
Effective engagement deals with significant subjects
$
»
Value creation
and
risk mitigation
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%
Company’s
willingness
Investment
Portfolio
Change
through
dialogue
Company’s
ability
27
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
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High impact
Appropriate communication is crucial for effective change
Jointly call an EGM
Arrange a
joint
shareholder
resolution
Joint meeting
with management
Specific
site visit
Company
visit
Manageme
nt
meeting
Letter and
e-mails
Active
voting
plus report
Joint
letter
Speaking
jointly at
AGM / EGM
Costs
Private
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Low
Collective with
large institutes
Give press
quote
Speak on
conference
s
Attend
AGM /
EGM
Manageme
nt
meeting
Open Issue press
letter release
Speak at
AGM /
EGM
Telephone
call
Low impact
Joint open
letter
Reputation Risk
High
Collective with all
shareholders
Low
High
In public,
through media
29
Our engagement process has twenty steps and
addresses –among others - the following:
Which objective and strategy?
Which company or companies?

Measurable objective

Led by occasion, theme or plan?
(SMART)

Including peers on similar topics

Strategy (incl. communication)

Directed theme research

Relation check
(outsourced) and company

Shareholder base
analysis
Final go or no go decision
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)
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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
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Pieces falling together in the latest innovation:
Engagement led divestment
Summary of proposed steps
Policy
Indicators
& Criteria
Engage
Assess
progress
Possible
exclusion
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
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The proposed process step by step
Policy
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”
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The proposed process step by step
Indicators
& Criteria
Policy
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 level in order to measure progress.
Example given:
Key indicators per industry per topic
Aerospace &
Defense
Environmental
Eco-efficiency
Emissions during plane's life
time
Project Finance
-
….
Ethics
Land mines
….
Soci
al
….
End producer
Strategic parts
Reseller
Auto manufactures
Banking
Building &
Construction
….
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Emissions during car's life
time
Solvents used in
manufacturing
ISO 14001
EMAS
Equator principles
35
The proposed process step by step
Policy
Step 3
Indicators
& Criteria
Engage
Service provider engages with a selection of companies and measures
the 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
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The proposed process step by step
Policy
Indicators
& Criteria
Engage
Assess
progress
Possible
exclusion
Step 4
and 5
Service provider advises the client to exclude companies that show lack of
progress on the severe, key indicators and fail to meet the pre-defined
minimum acceptable levels
Nature
of
advice
The advice includes:
1) the actual company behaviour;
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
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Possible developments in mainstreaming
responsible investments
Possible development of mainstreaming
responsible investments
Ethical
Best in class
funds
Responsible
Responsible
equity
portfolio
Return only
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Minimal exclusions
Voting and engagement
led divestment
Theme
funds
Traditional
equity
portfolio
Theme
funds
Core
Theme
39
Questions?
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Contact details: [email protected]
APPENDICES
APPENDIX 1
Collaboration of institutional investors
About fellow shareholders in the same game
Institutional investors become more active
and see their powers enhanced
Institutional investors recognize they are all fellow shareholders
Collaboration between fellow shareholders makes sense





Power
Effectiveness
Efficiency
Balance
Continuity
-
Bundled voting power
One voice with one message
Sharing work load
Adding arguments and challenging views
Longer term relationship
Institutional investors safeguard their own identity
Support of arguments but no association
Arguments count, but there is a lot more to it:





The
The
The
The
The
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balance of arguments
tone of voice
required timelines
communication method used
history of the relationship
44
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
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APPENDIX 2
Real life examples
About Royal Dutch Shell, VNU, CSM, Euronext,
Stork and ABN AMRO …
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
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Why would investors influence companies?
Responsibility as owner
– Obligation of having power
General value perspective
– Universal owner
– In general and in precedents
Identity as investor
– Labour organisations, churches
Focused value strategy
– Strong aligned with investments
– Strategic consultancy “offered”
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APPENDIX 3
Voting
Corporate governance is important and will even
become more important
"What is the overall
importance to your firm of
the corporate governance
of portfolio companies?"
Average
(n=322)
71%
Continental
Europe
(n=59)
61%
0%
“How do you expect your
firm’s views of the
importance of corporate
governance to change
over the next three
years?”
Extremely or
Very Important
20%
40%
Average
(n=322)
60%
80%
100%
63%
Continental
Europe (n=59)
Significantly or
Somewhat More
78%
0%
20%
40%
60%
80%
100%
Answers by 322 institutional investors from 2006 ISS Global Institutional Investor Study
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Compliance, extra return and client demand will
drive the importance of corporate governance
“What factors will drive
change in importance the
most?”
“What factors have driven
change in importance the
most?”
Next 3 years
Past 3 years
-
Scandals
-
Focus on compliance
+
Enhanced Investment returns
+
Client Demands
+
Risk management
+
Momentum / Progressiveness
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
Answers by 322 institutional investors from 2006 ISS Global Institutional Investor Study
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