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: F.C.Breen@robeco.nl

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?”

+

+

+

+

-

-