Corporate Governance Principles

Transcription

1 Excellence. Responsibility. Innovation. Principles, December 2016 Hermes EOS Corporate Governance Principles Switzerland For professional investors only

2 Principles, December 2016 Endorsement of the Swiss Code of Best Practice for Corporate Governance We endorse the Swiss Code of Best Practice for Corporate Governance (the Code) set out by economiesuisse 1 and updated in We encourage companies to either comply with it or explain their reasons for non-compliance. However, the Code does not sufficiently cover all the issues we regard as important. In our Swiss Corporate Governance Principles, we therefore address additional issues, highlight certain points and set out our preferred approach to particular matters. We also reflect on the implementation of the Swiss Ordinance Against Excessive Remuneration (the Ordinance) which came into force on 1 January This document intends to assist Swiss companies and their directors in understanding our views on these issues. Shareholder rights Distorted shareholder rights Swiss law allows companies to have different classes of shares, such as shares without voting rights and profit sharing certificates. Any limitation of shareholder voting rights to parts of the share capital can separate the economic interests of shareholders from their voting rights. We strongly support the principle of one-share one-vote, which ensures proportionality between equity ownership and voting power, and thus economic risk bearing. We believe that equal voting rights should be attached to shares. A number of Swiss companies can also opt out or opt up the Swiss takeover bid rule, in other words increase the threshold at which a buyer is obliged to make a tender offer. Any unequal treatment of shareholders is undesirable, as it increases investment risk and may reduce management accountability. All distortions to shareholders rights should be clearly reported. However, we encourage Swiss companies to remove all of them. Dilution and pre-emption rights We believe that pre-emption rights are an important safeguard for shareholders and their interests as part-owners of companies, and we will carefully consider whether to waive them on a case-by-case basis. We expect detailed justification of requests to waive these rights for capital requests in excess of 20% of existing share capital. With regard to capital requests to fund equity-based remuneration, we will consider the potential dilution impact and the quality of the plans. Provision of information The provision of timely, high-quality information is a pre-requisite for the intelligent exercise of the voting rights of shareholders. We also encourage companies to complement the legal proxy material with a report that includes key information to assist shareholders in making better informed decisions. We urge companies to publish the detailed results of the votes of the general meeting on their website, including the percentage of the total votes for, against and withheld for each resolution. Board of directors We place a strong emphasis on the overall balance and diversity in the composition of a board. The board should be made up of members with an appropriate and diverse range of competencies, gender, knowledge and experience to enable it to effectively discharge its duties and responsibilities. These include leadership skills to move the company forward, expertise to make decisions, independence to hold executive management to account and international and other experience to reflect the company s footprint. We also value gender diversity on boards to challenge the traditional talent pool of directors and to encourage diversity and inclusion throughout the organisation. We believe that boards should seek diversity in its broadest sense, taking into account its long-term strategic direction, business model, suppliers, employees, customers and geographic footprint. We believe that boards should now achieve a minimum of 30% female representation at the board level and, if not at that level, set out plans to reach the target. Independence While representation of significant shareholders on the board can be justified and useful, we expect there to be a strong core of independent directors to ensure that the interests of minority shareholders are protected, to exercise objective judgment and, if necessary, to act as agents for change. The Code s definition of independence is not specific. We strongly recommend that at least half of the directors on the board be free of any conflict of interests. These include directors with long tenures, those representing some shareholders or those with a material business or personal involvement with the company or other strong connections with directors, such as serving together on the boards of other companies. We expect a biography of all directors, including their area of expertise and whether and why the company considers them independent. We encourage a carefully considered explanation in circumstances where the board composition does not meet these requirements. Multiple and cross-directorships We do not support unjustified cross-directorships. A director needs to dedicate time to the company in order to appropriately fulfil his or her duties. As companies set the maximum number of mandates in their articles of association, we expect an explanation when a director holds more than four other directorships in listed companies not affiliated to the company, including foreign businesses, when a director with executive responsibilities holds more than one other directorship or when a director already chairs a board or an audit committee. A director should consult and receive the permission of the board before accepting an additional mandate. Committees Committees should be chaired by independent directors and have no executive members. We welcome the recommendations in the Swiss Code on committees, especially on the skills requirements. Additionally, we encourage companies to ensure that their audit and remuneration committees are fully independent. A majority of the nomination committees should be independent, including independence from significant shareholders. When these conditions are not met, the board should explain how potential conflicts of interest are dealt with. When assessing candidates for the remuneration committee, we consider the criteria above, as well as the personal track record of directors, in their current capacity and beyond. We may question the appropriateness of the nomination of executives from other companies for this committee. Chairing of the board Since the responsibilities and competencies of the chair of the board and the chief executive officer (CEO) are different, we believe the roles are most effectively discharged by two different individuals. The separation of the roles ensures the focus of the CEO on the 1 Available at: 2

3 Hermes EOS management of the company, while a separate chair introduces an additional element of overview and accountability, particularly when the chair is independent. An independent chair helps to ensure the accountability of the CEO for managing the company in the interests of shareowners. To us, chairs are non-independent and executive when they receive material remuneration in exchange for their time-consuming commitment to the company. Lead independent director We expect the appointment of a lead independent director, particularly where the chair can be classed as non-independent. The role and prerogatives of the lead independent director should be clearly defined in the published rules of the board or articles of association. Among his or her key duties are to lead the assessment of the performance of the chair and to act as a direct link to shareholders. Where the chair is nonindependent, the lead independent director should be able to convene board meetings under certain circumstances. We also call him or her to account for the management of conflicts of interest and the governance standards of the board and the company. Therefore, in addition to his or her formal powers, we expect the lead independent director to have the character to tackle difficult issues in the boardroom. Evaluation of the board We welcome greater transparency on the work of the board and the rules and procedures in place to facilitate its functioning. Regular reviews of the performance of the board and its members are beneficial to companies, as they help to identify potential weaknesses so that they can be addressed before causing problems. We therefore encourage companies to implement a formal process for these evaluations and to communicate on the areas identified for improvements. Where the chair is not independent, we expect the lead independent director to lead this process. Remuneration Say-on-pay Companies should decide under which relevant format, whether prospectively or retrospectively or under a mix of structures, they put the remuneration amount to a vote. We also expect an annual nonbinding vote on the remuneration report of companies. The purpose of obtaining non-binding approval of the policy from shareholders is to facilitate a dialogue between investors and the company on remuneration and to provide them with an opportunity to formally express their opinion on the design, as well as the implementation, of the remuneration policy. This dialogue will contribute to inform the binding vote on the remuneration of executive directors required by the Ordinance in a constructive manner. Furthermore, we emphasise the need for appropriate disclosure of performance criteria ex-ante, their link to the company s strategy and the rationale for the actual grant of equity made with regard to the performance ex-post. Where companies fail to address a significant level of shareholder opposition to pay practice, we may register our concerns by voting against the re-election of remuneration committee members. When setting the remuneration principles in the articles of association, Swiss companies should avoid being too general to be meaningful. The most important elements of the pay policy belong in the remuneration report. However, the remuneration committee should use its discretion to ensure that awards properly reflect the performance of the business. Link between pay and performance Executive remuneration continues to be an area of concern for Hermes EOS. While the legal requirements for specific features and disclosure have led to improved transparency regarding the link between pay and performance, experience shows that, in many cases, remuneration still fails to align the interests of executives with those of long-term shareholders. In particular, it often fails to safeguard against excessive risk-taking or be sufficiently reflective of long-term performance. We do not consider stock price appreciation on its own to be an appropriate performance metric. We expect long-term remuneration plans to employ specific metrics, with rigorous targets, that are closely linked to a company s long-term strategy. This nexus should be clearly explained in the disclosure on pay within the proxy document. Most variable remuneration should be explicitly linked to these performance targets and not simply vest over time. Our interest is not limited to executive-level remuneration. In particular, at organisations where staff pay makes up a high portion of the overall costs, we have concerns that levels of pay and performance criteria may create perverse and short-term incentives for employees. We therefore encourage companies to improve their disclosure on how incentives for individuals with the ability to materially affect the performance of the business are linked to the interests of long-term shareholders, including the effective management of risk. Furthermore, we believe that non-executive directors should not receive variable remuneration. Remuneration principles We are concerned that executive remuneration structures around the world are not fit for purpose, neither serving long-term investors nor, in many cases, properly aligning with the core long-term objectives of companies. Therefore we continue to hold many discussions globally on reforming pay with remuneration committee members, executives, human resource professionals, remuneration consultants and other investors. We believe that the principles that we developed with a number of pension funds to provide high-level guidance to companies about our expectations of their pay structures and practices should be taken into account by all remuneration committees, which need to explain how they fulfil each principle disclosed within the proxy statement. The Remuneration Principles for Building and Reinforcing Long-Term Business Success are: 1 Remuneration committees should expect executive management to make a material long-term investment in shares of the businesses they manage. 2 Pay should be aligned to long-term success and the desired corporate culture throughout the organisation. 3 Pay schemes should be clear, understandable for both investors and executives, and ensure that executive rewards reflect long-term returns to shareholders. 4 Remuneration committees should use the discretion afforded them by shareholders to ensure that awards properly reflect business performance. 5 Companies and investors should have regular discussions on strategy and long-term performance. The full version of the Remuneration Principles, along with a number of other policy documents on remuneration and other topics which Hermes EOS has produced, can be found on our website at

4 Principles, December 2016 Environmental and social risk management Companies should manage effectively environmental and social factors that are relevant to their business, with a view to enhancing their sustainability. They also ought to regularly disclose to shareholders how they identify and manage these material risks and provide evidence that the processes to do so are effective. Furthermore, companies should clearly define board and senior management responsibilities for environmental and social issues, as over the long term these will affect the value of companies and their ability to do business. Therefore, we seek to enter dialogue where we judge the management of, or reporting on, environmental and social issues to be insufficient. Uncontrollable climate change is a systemic risk to the value of the portfolios of our clients because of its economic and geopolitical consequences. We therefore support the ambition of the 2015 Paris agreement of 195 countries to limit the increase in global temperature as a result of climate change to below 2 C. This historic commitment was helped by the intervention of companies globally which publicly encouraged political action in the run-up to and during the UN climate change conference. Because of the systemic risk to the global economy, we encourage all companies to support publicly the ambition of the Paris agreement and to have this commitment embedded as a central tenet of their public policy and sustainability activity. To support this, boards should ensure that they have climate change on their board meeting schedules at least annually and that they expose themselves and senior management to experts who can challenge them on the strategic risks and opportunities that global warming represents. Companies licences to operate are increasingly affected by their reputation, including their performance on human rights. We support the UN Guiding Principles on Business and Human Rights and the UN Global Compact. We expect companies to use the reporting framework for the Guiding Principles to disclose how they manage human rights issues that are salient to their business. 4

5 Excellence. Responsibility. Innovation. Hermes Investment Management Hermes Investment Management is focused on delivering superior, sustainable, risk-adjusted returns responsibly. Hermes aims to deliver long-term outperformance through active management. Our investment professionals manage equity, fixed income, real estate and alternative portfolios on behalf of a global clientele of institutions and wholesale investors. We are also one of the market leaders in responsible investment advisory services. Why Hermes EOS? Hermes EOS enables institutional shareholders around the world to meet their fiduciary responsibilities and become active owners of public companies. Hermes EOS is based on the premise that companies with informed and involved shareholders are more likely to achieve superior long-term performance than those without. Our investment solutions include: Private markets International real estate, UK commercial real estate, UK private rental sector real estate, infrastructure and private equity High active share equities Asia, global emerging markets, Europe, US, global, and small and mid cap Credit Absolute return, global high yield, multi strategy, real estate debt and direct lending Multi asset Multi asset inflation Responsible Investment Services Corporate engagement, intelligent voting and public policy engagement Offices London New York Singapore Contact information Hermes EOS Natacha Dimitrijevic +44 (0) natacha.dimitrijevic@hermes-investment.com Business Development United Kingdom +44 (0) Africa +44 (0) Asia Pacific Australia +44 (0) Canada +44 (0) Europe +44 (0) Middle East +44 (0) United States +44 (0) Enquiries marketing@hermes-investment.com Disclaimer This communication is directed at professional recipients only. The activities referred to in this document are not regulated activities under the Financial Services and Markets Act. This document is for information purposes only. It pays no regard to any specific investment objectives, financial situation or particular needs of any specific recipient. No action should be taken or omitted to be taken in reliance upon information in this document. Any opinions expressed may change. This document may include a list of Hermes EOS Limited ( HEOS ) clients. Please note that inclusion on this list should not be construed as an endorsement of HEOS services. HEOS has its registered office at Lloyds Chambers, 1 Portsoken Street, London, E1 8HZ. CM155865/T5064 Global 12/16