DJSI 2017: Corporate Governance & Materiality November 2017

Transcription

1 DJSI 2017: Corporate Governance & Materiality November 2017

2 Agenda Corporate Governance Michael van der Meer, Sustainability Investing Analyst Materiality Isabelle Stauffer, Sustainability Operations Manager Q&A 2

3 Participation 942 Companies from 11 Sectors Actively Participated in the 2017 CSA Source: RobecoSAM Corporate Sustainability Assessment

4 2017 Methodology Corporate Governance Review 4

5 Corporate Governance is Foundational Boards form a key component of corporate governance, thus it is important that the board members selected are sufficiently independent and have the right experience and skills. To that end, we added two new questions and modified two existing questions in the 2017 CSA As always, when we add new questions there is a redistribution of question weights On average, participating companies Corporate Governance Criterion scores declined from 67 to Source: RobecoSAM Corporate Sustainability Assessment

6 Board Independence is of Crucial Importance CSA Board Independence - Backtest Performance (Quartiles) /1/2010 9/1/2011 9/1/2012 9/1/2013 9/1/2014 9/1/2015 9/1/ Quartile 1 Quartile 2 Quartile 3 Quartile 4 Universe Source: RobecoSAM Corporate Sustainability Assessment

7 Corporate Governance Changes in Board Structure updated scoring on the share of independent directors and board size 2. Non-executive Chairman/Lead Director 3. Responsibilities and Committees 4. Diversity Policy sharpened the focus of Board Nomination Process question 5. Gender Diversity 2017 Methodology 6. Board Effectiveness 7. Average Tenure new question Review 8. Board Industry Experience question spun out of Board Nomination Process 9. Executive Compensation Success Metrics & Vesting 10. Management Ownership Requirements 11. Disclosure of Median or Mean Compensation of all Employees & CEO Compensation 12. MSA Corporate Governance 7

8 Board Structure Stricter Focus on Definition of Independence Aspects Expected practice Assessment Changes in 2017 Board type Board size is less than or equal to Methodology Review Board independence statement Percentage of board s independent directors is equal to or higher than 90% of total board size Publicly available independence statement and public reporting on explicit definition of independent director!!! Research supports the idea that board size ranging from 7 to 11 members is preferable, companies could still score some points with a board size of up to 15 members To get points a company s definition had to fulfill the criteria outlined in the question s info button/appendix I of this slide deck Public reporting on a target share of independent directors on the board Assessed as in

9 Board Structure Average Independence Ratios Worldwide Observations: Amongst participating companies, North America leads by a wide margin with an average board independence ratio of 84.7% The global average is 48.8% For a list of global stock exchange independence standards that we did and did not accept, please see Appendix II Asia Pacific Emerging Markets Europe North America Global Source: RobecoSAM Corporate Sustainability Assessment

10 Board Structure Average Independence Ratios Across Industries Source: RobecoSAM Corporate Sustainability Assessment

11 Leading Practice Examples Board Structure AES Corp/VA 8 of the nine members of the company s board of directors are independent directors, surpassing the company s (publicly available) target to have a majority of independent directors, and the company has a publicly available board independence statement Proxy Statement Proxy-FINAL.pdf#page=13 AES Corp Target Share 11

12 Diversity Policy (formerly part of Board Nomination Process) Aspects Expected practice Assessment Changes in 2017 Board nomination policy Publicly (or internally) available board nomination policy that specifically covers diversity factors such as:! We simplified this question to focus on the key elements of diversity from an investment perspective Gender And at least one of: Race or Ethnicity Nationality or country of origin 12

13 Diversity Policy Companies Policies & Aspects Covered 100% Gender Nationality or country of origin Race or Ethnicity 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% No Policy Aspect Not Included Not Accepted Aspect Included 13

14 Diversity Policy s Coverage % of Accepted Board Nomination Policies Which Cover At Least One the Following Diversity Aspects 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: RobecoSAM Corporate Sustainability Assessment 2017 Gender Nationality Ethnicity 14

15 Leading Practice Examples Emerson Electric Co Public Service Enterprise Group Inc Public evidence of a board nomination policy including: Gender Race or Ethnicity Nationality or country of origin The Corporate Governance and Nominating Committee considers diversity (including, but not limited to, race, gender, national origin, religion, disability, age or sexual orientation) as well as such other factors as it deems appropriate given current and anticipated future needs of the Board and Company. Diversity is a factor for consideration of nominees for director. In considering diversity, the Corporate Governance Committee utilizes a broad meaning of diversity, including factors such as race, gender and national origin. Source: 06.pdf#page=12 Notice of annual meeting of stockholders, page mages/pseg-proxy2017.pdf#page=28 Proxy Statement 2017, page

16 Average Tenure Board tenure reflects retention and continuity on one hand, and refreshed skills and perspectives, and independence on the other. Our research suggests that optimal board tenure is in the 7 to 12-year range, and that firm value declines as average tenure deviates therefrom. The average value for assessed companies was 7.07 years. Aspects Expected practice Assessment Changes in 2017 Average tenure of board members Average tenure (in years) of board members on company s board of directors/supervisory board lies between 7-12 years If your company has a one-tier board structure, this figure includes all members (executive directors, nonexecutive directors and independent directors). If your company has a two-tier board structure, this figure only includes independent directors and nonexecutive directors (e.g. excludes employee representatives).! This question was new in

17 Average Tenure By Sector Average Number of Years Board Members Serve on the Board of Directors Methodology 6 Review Source: RobecoSAM Corporate Sustainability Assessment

18 Average Tenure Examples Distribution of Assessed Companies' Average Tenure < >31 American Express: 7.5 years Amazon.com: 10.9 years Swatch Group AG: 11.8 years CK Hutchison Holdings Ltd: 17.8 years Berkshire Hathaway Inc: 19 years Kobe Steel Ltd: 30 years 18

19 Board Industry Experience This question focuses on industry and audit experience, two of the most important skill sets for setting strategy and effectively monitoring and evaluating management's performance. Aspects Expected practice Assessment Changes in 2017 Board industry experience More than 80% of independent or nonexecutive members have relevant working experience (management, academia, or research) in the company s industry according to GICS level 1 industry classification: Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Real Estate Telecommunication Services Utilities This number should not include board members who are executives or elected as employee representatives! This question was spun out of last year s Board Nomination Process question Reporting on the names of the directors included in the above count! 19

20 Board Industry Experience % of Participating Companies Independent or Non-Executive Board Members with Sector Experience 75% 70% % Methodology Review 60% 55% 50% Source: RobecoSAM Corporate Sustainability Assessment

21 Leading Practice Example Board Industry Experience Hologic Inc (MTC Health Care Equipment & Supplies, GICS Health Care) The company has a high share (87.5%) of independent or non-executive directors with relevant working experience in Health Care according to GICS level 1 industry classification. ; Hologic Inc 2017 Proxy Statement, Page 13 Director Name Sally W. Crawford Charles J. Dockendorff Scott Garrett Lawrence M. Levy Christiana Stamoulis Elaine Ullian Amy M. Wendell Industry Experience Former CEO, Healthsource, Inc. Former CFO & Executive VP, Covidien plc Senior Operating Partner, Water Street Healthcare Partners Former Director of Scivanta Medical Corporation CFO & Head of Corporate Development, Unum Therapeutics Former CEO & President, Boston Medical Center Former Sr. VP, Strategy & Business Development, Covidien plc 21

22 Corporate Governance Appendix I. Explicit definition of Board Independence Statement Independent directors are non-executive directors that are independent by meeting at least 4 of the 9 independence criteria (of which at least 2 of the 3 first criteria) listed below: 1. The director must not have been employed by the company in an executive capacity within the last five years. 2. The director must not accept or have a Family Member who accepts any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current fiscal year or any of the past three fiscal years, other than those permitted by SEC Rule 4200 Definitions. 3. The director must not be a Family Member of an individual who is, or during the past three years was employed by the company or by any parent or subsidiary of the company as an executive officer. 4. The director must not be (and must not be affiliated with a company that is) an adviser or consultant to the company or a member of the company s senior management. 5. The director must not be affiliated with significant customer or supplier of the company. 6. The director must have no personal services contract(s) with the company or a member of the company s senior management. 7. The director must not be affiliated with a not-for-profit entity that receives significant contributions from the company. 8. The director must not have been a partner or employee of the company s outside auditor during the past three years. 9. The director must not have any other conflict of interest that the board itself determines to mean they cannot be considered independent Other non-executive directors are directors that are not executives but also do not qualify as independent as defined above. They are all other members of the board not already accounted in the executive and independent categories. They might be employed by the organization. 22

23 Corporate Governance Appendix II. Stock Exchanges Independence Definitions Accepted Australia Belgium Brazil Denmark European Union Finland France Greece Hungary India Italy Japan Luxembourg Netherlands New Zealand Norway Philippines Qatar Russian Federation Singapore South Africa Spain Sweden Thailand UK USA Not Accepted Austria Canada China Czech Republic Germany Hong Kong Ireland Malaysia Republic of Korea / South Korea Sri Lanka Switzerland Turkey 23

24 2017 Methodology Materiality Review 24

25 What is materiality? Definition of Materiality Material issues are sustainability factors that can have a present or future impact on companies value drivers, competitive position, and therefore on long-term shareholder value creation. Materiality assessment is an approach to identify critical economic, environmental and social issues which have a significant impact on the company's business performance. 25

26 What is materiality? Relevance of materiality assessment Why is materiality assessment useful for companies? By understanding what issues are material to their operations, the environment and communities, companies can better avoid or mitigate risks and gain access to opportunities. It helps companies identify sources of long-term value creation and understand the link between long-term issues and the business case. Materiality is at the center of sustainability reporting and communication with stakeholders. Why is materiality assessment useful for investors? Investors are interested in sustainability issues with long-term, material benefits on financial returns. Investors are interested in knowing how material issues impact the business value drivers, what are the company s strategies for responding to these issues, and what is the progress towards achieving related targets. 26

27 Materiality: criterion structure RobecoSAM s materiality criterion consists of two questions: 1. Material Issues 2. Materiality Disclosure This question assesses whether companies: have conducted a materiality analysis of the most important issues driving long-term value creation. This question assesses whether companies: are disclosing their materiality analysis, targets and progress towards established targets or metrics. have convincingly linked the material issues to their business strategies and performance. are managing their performance in relation to the material issues over the long-term. have linked the material issues to the company s executive compensation. 27

28 Average Scores at Question Level Overall Performance Across Regions Asia Pacific Emerging Markets Europe North America Material Issues Materiality Disclosure Source: RobecoSAM Corporate Sustainability Assessment participating companies 28

29 Material Issues Question structure Material Issue 1 Material Issue 2 Material Issue 3 Material Issue: Business case: The company provides a brief rationale for why this issue is material to its business. Business impact: The company provides the type of impact (cost/revenue/risk) the material issue has on its business. Business strategies: The company specifies its primary business strategies, initiatives or products that address the material issue. Long-term target/ metric: The company has a long-term target to measure its progress on the material issue. Target Year: Executive compensation: The company uses its material issue, metric or target for determining executive compensation. 29

30 Material Issues Material Issue: Please specify your material issue RobecoSAM s expectations: Companies have conducted a materiality analysis and identified the most important issues driving long-term performance. Companies clearly define the three most material economic, environmental or social issues driving long-term value creation. Not acceptable: Purely financial metrics / issues (net profit, cash flow, earnings per share, product sales). Operational business metrics / issues (e.g. market expansion, efficient use of capital, operational excellence). General issues without a description of the specific sub-issues that might impact the company s performance (e.g. macroeconomic conditions, long-term shareholder value). Companies that did not provide an acceptable material issue did not receive points for any of the subquestions related to that material issue. 30

31 Material Issues Business Case: Please provide a brief rationale for why this issue is material to your business RobecoSAM s expectations: The business case should contain the following information: Clear link between the material issue and the business case. Clear explanation of why the issue is material to the company s performance in terms of cost/revenue/risk (e.g. cost savings, revenue generation, operational risks with direct impact on 2017 financial Methodology performance). Review Acceptable example: Material Issue: Safety of employees and subcontractors (Construction). Business Impact: Risk. Business case: Poor safety standards for employees and contractors lead to a direct negative impact on labor costs through lower productivity and hinder the company s ability to hire the best talent. Lower performance not only poses a threat to the company s reputation and staff morale but also results in increased operating costs in the form of fines and other contingent liabilities. 31

32 Material Issues Business Case: Please provide a brief rationale for why this issue is material to your business Not acceptable: Business case is not linked to the material issue. Business case does not link the material issue to the company s performance in terms of costs, revenues or risks. Business case is describing the material issue and its importance for society / the environment but does not provide information on why the issue is relevant to the company s performance (e.g. impact of global warming on society) Methodology Review 32

33 Material Issues Business strategies: Please specify your primary business strategies, initiatives or products that address this issue RobecoSAM s expectations: The company provides a clear explanation of the strategies, initiatives, or products or services through 2017 Acceptable Methodology example Review which it addresses the material issue. Material Issue: Safety of employees and subcontractors (Construction) Business Impact: Risk Business Strategies: To increase the safety of its employees and subcontractors, the company has taken a number of measures, including but not limited to: risk assessment to identify safety hazards across all its work sites. annual mandatory safety training for all the company s employees and subcontractors. adherence to global safety standards that must be achieved by all the company s operations. 33

34 Material Issues Business strategies: Please specify your primary business strategies, initiatives or products that address this issue Not acceptable: Strategies, initiatives, or products or services that do not directly address the material issue. Strategies that are not clearly described (e.g. human resources-oriented management). Description of the current situation without providing the strategies or products to address this situation Methodology Provision of a target instead of a strategy, initiative or product (e.g. zero fatalities or injuries). Review 34

35 Material Issues Long-term metric: Do you have a long-term target or metric to measure your progress on this issue? Please specify this target or metric if available. Target year: Please specify the year for the long-term target RobecoSAM s expectations: The metric or long-term target is linked to the material issue. The metric or long-term target is clearly described Methodology The time horizon of the long-term target should be at least three years. Review Indicating the current reporting year as target year is acceptable if: The current reporting year (e.g. 2017) corresponds to the long-term target s finishing year. The company explicitly states that it has a long-term commitment to the material issue and specifies that the metric / target applies every year. 35

36 Material Issues Long-term metric: Do you have a long-term target or metric to measure your progress on this issue? Please specify this target or metric if available: Target year: Please specify the year for the long-term target: Acceptable example: Material Issue: Safety of employees and subcontractors (Construction). Target: Zero workplace accidents by 2020 or 2017 Methodology Review zero workplace accidents every year. Not acceptable: Targets/metrics are not linked to the material issue. Vague targets or targets whose progress cannot be measured (e.g. ensure a good working environment, reduce workplace accidents). Targets are short-term (less than 3 years). 36

37 Material Issues Executive Compensation: Is your material issue, metric or target used for determining executive compensation? If yes, please explain: RobecoSAM s expectations: The metric or target used for determining executive compensation is clearly defined and linked to the 2017 Methodology Review material issue. The executive compensation is linked to the performance on the material issue, metric or target. There is a clear indication that the performance on the provided material issue, target or metric is linked to the compensation of the executive management, not only of the respective line managers. Acceptable example: Material Issue: Safety of employees and subcontractors (Construction) Target: Zero workplace accidents by Executive compensation: 10% of the annual variable compensation of the company s CEO and executive management of each division is linked to achieving the company s long term target of zero workplace accidents by

38 Material Issues Executive Compensation: Is your material issue, metric or target used for determining executive compensation? If yes, please explain: Not acceptable: The executive compensation is linked to the company s general CSR policy or the company s 2017 Methodology Review environmental performance. The metric/target is used for determining management performance but there is no explanation of how performance is linked to executive compensation. The metric/target indirectly contributes to the company s general financial performance metrics (e.g executive compensation is linked to EBIT, as improved operational eco-efficiency reduces operational costs and therefore increases EBIT). 38

39 Linking Material Issues to Executive Compensation % of companies linking material issues to executive compensation 100% 90% 80% 2017 Methodology 70% 60% Review 50% 40% 30% 20% 10% 0% Asia Pacific Emerging Markets Europe North America World 1 Material Issue 2 Material Issues 3 Material Issues 0 Material Issues Source: RobecoSAM Corporate Sustainability Assessment participating companies 39

40 Materiality Disclosure Part 1: We publicly disclose our materiality analysis, including the most material issues and a description of the process. RobecoSAM s expectations: Companies publicly report on the following information: 2017 Methodology Review Description of the materiality analysis process (e.g. materiality framework). Identification of the most material issues. Prioritization of the most material issues. Evidence that external stakeholders are included in the materiality analysis process. 40

41 Materiality Disclosure Part 2: We publicly report on our progress towards our targets or metrics for material issues. RobecoSAM s expectations: Companies publicly report the following information: Targets are reported for the majority of the material issues provided in the question Material Issues Methodology Review Progress towards achieving the targets is reported for the majority of the material issues provided in the question Material Issues. 41

42 Materiality Disclosure: Example 1 BMW - Bayerische Motoren Werke AG The company provides: Information on the materiality analysis process, which includes both internal and external stakeholders. Clear identification and prioritization of the material issues through a materiality matrix. Targets related to the most material issues and progress toward these targets. Public Link: Click here to access BMW Group s Sustainable Value Report The materiality analysis is available on pages

43 Materiality Disclosure: Example 2 Schneider Electric SE The company provides: A detailed public explanation on the process adopted to identify and prioritize key issues material to its business. Evidence that the process adopted includes consultation with both internal and external stakeholders Methodology Targets related to the identified material issues and progress made towards these targets. Review Public Link: Click here to access Schneider Electric SE s Registration Document The materiality analysis is available on pages

44 2017 Methodology Upcoming Webcasts Review 44

45 More Information and Upcoming Webcasts Annual Scoring & Methodology Review Read up on this year s major changes: Final DJSI Results & Feedback Webcast Operational Eco-Efficiency and Human Capital Development Thursday, November 30 at 2pm CET Send us your questions in advance! assessments@robecosam.com 45

46 Other Updates Via The Leading Practices Database is now available The Benchmarking Database is available to companies with 2017 results On Bloomberg: 2017 Methodology Selected percentile rankings at the total and dimension levels have been published Review 46

47 General Reminders Data Quality Consult the information texts each year, and read the question texts carefully to ensure that nothing has changed from one year to the next Ensure that the provided data meets the definitions provided by RobecoSAM In case something is not clear, consult the CSA Helpline for clarification 2017 Supporting Methodology References Gradually try to reduce overall number of references while simultaneously providing more public references Review Be as specific as possible in terms of page number and sections of the documents Only provide comments and documents that are relevant for the question Documents should be provided in a timely manner, within the assessment timeframe and RobecoSAM should be informed in advance if any of documents will be finalized after the deadline Non-English Documents The official language of the CSA is English, we rely on translations to verify answers In cases where we specifically ask for public information, we expect this to be in English, so that it is accessible by all investors globally 47

48 Questions? Contact us: RobecoSAM CSA Helpline Methodology Visit the CSA website: Review 48

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50 2017 Methodology Q&A Review 50