Corporate governance is about protecting shareholders, aligning the interests of companies with investors as well as maximising shareholders’ long term interests.
WHAT WE KNOW
Corporate governance covers a broad remit, from how a company is managed to relations with shareholders. For us, it’s about looking after the long term success of the businesses we invest in and voting and engaging directly with their senior management and making sure they have the right structure in place to manage their own risks and opportunities. We’re committed to using our position of influence to help improve board practices and performance in the markets in which we invest. This involves engagement with investee companies directly and collaboratively with other institutional investors, Government and regulators.
Excessive executive remuneration has been under public scrutiny for many years, but the spotlight has particularly intensified recently. We voted against 126 UK remuneration related resolutions in 2012. Of those where we recommended changes, over 40% amended their plans.
We pushed for pay packages to be simpler, aligned with shareholder interests and to support the long term strategy of the business. We have actively participated in numerous industry consultations including the Department for Business Innovation and Skills (BIS) Executive Remuneration consultation.
WHAT WE ARE DOING TO IMPROVE EVERYDAY CORPORATE GOVERNANCE
We have expanded our team over recent years; the team now consists of seven professionals with an average of 14 years’ investment experience.
We voted at 2,616 general meetings of 2,541 companies, covering all major developed markets. We followed up with companies on our against votes in key markets. This allowed us to explain our voting policy and rationale as well as to build relationships with companies in these regions.
We signed up to international investor network groups including the International Corporate Governance Network, the Council of Institutional Investors (US) and the Institutional Investor Group on Climate Change.
SHAPING THE FUTURE
As a major shareholder in global companies, we consider it important to try to shape the future of corporate governance and to improve best practice. One of the most constructive ways to achieve this is to voice our views through submissions to industry consultations. We responded to the following consultations during 2012: BIS on Executive Pay, ESM on the Role of Proxy Advisers, FSA Enhancing Listing Rules, Kay Review, FRC Corporate Governance and Stewardship Review, and the Japan Ministry of Justice on Corporate Governance.
In 2012, we changed our engagement target from monitoring the number of individual companies we hold meetings with to measuring the total number of meetings held. We have found we get the best results through repeated meetings with company boards and executives. Our target for 2012 was to engage with companies on 300 occasions1, and in fact we held 425 meetings2.
Key focuses for 2013 in our engagements will include:
- ensuring better alignment with shareholders on executive pay across UK Plc;
- improving Gender Diversity in UK boardrooms especially in Mid-Cap listed companies;
- in the US, liaising with technology companies on issues such as human rights in the supply chain and political spending;
- seeking better board independence on Japanese listed companies;
- improving UK reporting standards for shareholders with more concise and clearer disclosures;
- raising issue of auditor rotation for UK Plc; and
- sustainability issues impacting UK listed mining companies.
1. 25% of which covering environmental and/or social topics.
2. 30% of which covered environmental and/or social topics.
ENGAGEMENT EXAMPLE – GLENCORE/XSTRATA
As one of the largest institutional asset managers in Europe, we use our scale to bring about change and represent our clients in the most powerful manner. This is an important differentiator when communicating and voting on companies. We also work with other major shareholders, as our consolidated voice adds significant weight to our views.
The terms of the proposed merger between Glencore and Xstrata originally envisaged a tie-up based on a 2.8 share ratio and included ‘Management Incentive Arrangements’ (MIAs).
There was effective pressure from shareholders to oppose this and revised terms were subsequently put forward with a 3.05 share ratio and MIAs which would only take effect if approved by Xstrata shareholders.
During this process LGIM met with the management of both companies 15 times. We consistently disagreed with the additional incentive arrangements and voted for the deal without the MIAs. The deal was eventually completed without the controversial MIAs which were voted down at the extraordinary general meeting of Xstrata (EGM). Just over 78% of shareholders voted against the MIAs at the EGM.
The Xstrata chairman stood down following this vote. LGIM is helping with the new Chairman appointment process and did not go public with any of this throughout the 11-month period.