10 DECEMBER 2002
CORPORATE GOVERNANCE/RESPONSIBLE ENGAGEMENT
Report by the Director of Finance
This report reviews the voting record of the Fund’s
investment managers and outlines meetings with
companies on responsible engagement
1. This report reviews the process of corporate governance and responsible
engagement in the quarter 1 July 2002 to 30 September 2002.
2. Firstly, I am pleased to report that the Norfolk Pension Fund has been
awarded the Public Treasurer Investment Award for Corporate
Governance. These awards are nationally recognised in the local
government sector and I am delighted that our efforts have been
acknowledged in this way.
3. The Voting History of the Fund for this quarter is shown in Appendix A.
There are fewer Annual General Meetings held during this time of year
and therefore the voting record is much reduced from previous months.
4. The history of engagement undertaken by the Fund Managers is shown in
5. It is pleasing to note that following recent adjustments in our policy,
Deutsche Asset Management and Société Générale have voted and
engaged in accordance with our policy and there are no negative issues
to draw to the Investment Committee’s attention.
6. Fidelity however, do not appear to have implemented the improvements
to their voting policy that were promised at the September Investment
Committee. This is being investigated and the resolution will be reported
at the March Investment Committee.
7. An interesting case is Anite Group, which has previously had adverse
press reports on Corporate Governance issues. Their Finance Director
(who the Fund would have voted against for the reasons set out in
Appendix C) resigned shortly before his re-appointment was put to the
vote at the AGM. The reason for his departure was given as a desire to
pursue other interests. No indication has been given that institutional
pressure has played a part in this decision.
8. Société Générale (who have a holding on behalf of the Fund) have
engaged extensively with Anite, raising several concerns on Corporate
Governance issues. A summary of their engagement is attached at
Appendix C. It seems that the company is reacting to pressure from
institutional investors to put its house in order.
9. Deutsche Asset Management have also attached a statement on the
case of Harvey Nicholls Group plc, in which they are a major investor. As
there have been some press reports regarding this issue they have
issued a statement (which is attached as Appendix D for the attention of
It is recommended that the Investment Committee note the contents of
Company Resolution: Issue Norfolk Fund Manager Comments:
DeAM Soc Gen Fidelity For Against Abstain
(%) (%) (%)
Anite Group Plc Re-election of Director - 2 Year rolling contract Against Not Held Against For N/A: resigned on day of AGM N/A N/A N/A
BPB plc Re-election of director - Non independent NED with Against Against Not Held Not Held Remuneration committee not composed 89% 6% 5%
Michael Beckett independent responsibility, on entirely of independent directors
BPB plc Re-election of director - 1 Year rolling contract, extending on Against Against Not Held Not Held Contract extends to 2 years in event of a 84% 2% 14%
Paul Hollingworth takeover change in control
BTG plc Re-election of director - Non independent NED with Mgr For Not Held Not Held Considered Mr Radda to be 98% 1% 1%
Prof Sir G Radda independent responsibility (not Discretion independent, although he is not part of
remuneration committee) the Remuneration Committee
BTG plc Re-election of director - Dr Non independent NED with Against Against Not Held Not Held Remuneration committee not composed 97% 2% 1%
J Leonard independent responsibility - on entirely of independent directors
GUS plc Re-election of director - Mr 2 Year rolling contract Against Against Not Held Not Held Director has a two year rolling contract 87% 4% 9%
GWR Group plc Re-election of director - Mr Non independent director with Against Against Not Held Not Held Remuneration committee not composed 82% 5% 13%
R Gilbert independent responsibility - on entirely of independent directors
Invensys plc Amend Senior Exec breach of ABI guidance on Share Mgr For Not Held Not Held Approval sought to increase share 83% 17% 0%
remuneration incentives incentive schemes Discretion options under grant from 5% to 10%.
DeAM approved the Scheme for two
reasons: the first being that 5% is often
seen as being too restrictive; the second
that many of the share options are struck
at levels which are unlikely to be
attained. In practice we do not expect
dilution to exceed 5%.
Johnson Mathey Re-election of director - Mr 2 Year rolling contract Against Against Against For Director has a two year rolling contract 77% 3% 20%
plc J Sheldrick
Fidelity (page 1)
Stock Meeting attended by Subjects Discussed
Vodaphone Charlotte Grezo, Head of Corporate We asked Vodafone about their policies concerning:
Responsibility Team The environment
Nick Hughes, Senior Corporate Responsibility -Recycling
Manager -Digital Divide
-Visual impact of base stations
Vodafone reviewed its key impacts on the environment in 2001/02, it established indicators for several areas. One of the areas that the
company feels it can improve is energy usage. Most of the energy used is electricity. Reducing this would indirectly help to reduce CO2
emissions. Vodafone is focusing on the phone network as it accounts for eighty percent of the total energy used. For example, Vodafone is
looking at alternative energy sources, such as photovoltaic or fuel cells for use in base stations to maintain services during a mains power
failure. Alternative energy sources would potentially allow Vodafone to decouple from electricity grids and could be used in areas where there
is no access to electricity.
Recycling: Vodafone currently recycles old handsets returned by staff and customers in the UK, Japan and Australia. The company was
receiving 800 returned phones each week, however after introducing donations to charity this has risen to 1,200 per week. Vodafone is
looking to scale up phone recycling across the group.
Digital divide: Vodafone is looking at the issue of the ‘digital divide’ – the uneven distribution of access to the benefits of new communications
technologies. It is one of the founding members of Digital Europe. This project is looking at the role of mobile communications in promoting
sustainable social and economic development in Eastern Europe. In particular, it focuses on the role of wireless as a leapfrog technology over
conventional fixed line for bridging the ‘Digital Divide’.
Visual impact of base stations: Where possible, Vodafone uses innovative base station designs to minimise visual impact. However, a
factor it highlighted is that attitudes towards base stations varies between countries. For example, in Sweden the public prefers them to be
aesthetically pleasing, whereas in Italy consumers feel that if base stations are ‘disguised’ that firms are trying to hide them for a reason. In
developing its network, Vodafone takes these type of issues into consideration.
Health concerns: Rather than conducting research on health issues itself, Vodafone funds research by independent bodies including the
World Health Organisation (WHO). The company supports the viewpoint of the WHO that recent reviews have not found any adverse health
consequences associated with radio frequency fields from mobile phones or their base stations However, the WHO has identified the need for
further research to better assess health risks.
Fidelity (page 2)
Stock Meeting attended by Subjects Discussed
Shell Douglas McKay, Senior Energy Analyst, Discussions with Shell focused on:
Planning, Environment and Energy needs for the future
External Affairs Renewable energy sources
Mike Harrop, UK Investor Relations
Shell recognises that future energy needs will change. It uses long-term scenarios to help explore how energy systems could evolve. Shell
uses them to explore future possibilities and allow it to plan for factors that could influence its business.
Shell believes that in the long term the carbon intensity of the energy system will need to be reduced. Consequently, it has produced a study
titled ‘Energy needs, choices and possibilities – scenarios to 2050.’ Shell developed two scenarios within the constraints of the Kyoto
protocol. The study is focused on how energy paths could develop in a world where CO 2 emissions produced by human activities are
reduced to the extent that atmospheric carbon levels will stabilise below 550 ppmv (parts per million volume) within the next 50 years, and that
this will occur in an economically viable way. Shell highlighted three fundamental factors that it believes will drive energy markets in the
future: energy resource scarcity, new technology and social and personal priorities. In considering these three crucial factors, Shell has
explored two possible different paths to a sustainable energy system. It describes these as 'dynamics as usual' and 'the spirit of the coming
Dynamics as usual: Within this scenario the environmental targets are initially met through focus on efficiency improvements in existing
technologies and an increased use of renewable energies. However, as time progresses the company sees oil and gas resource constraints
leading to the emergence of a new generation of renewable technologies.
The spirit of the coming age: Within this path, a technology solution triggers a revolution in much the same way as the internal combustion
engine transformed transportation. One such potential technology that Shell is looking at is hydrogen fuel cells. The key factor with this
scenario is that potential new technologies often emerge from unexpected areas.
Changes made as a result of scenarios
The energy scenarios allow Shell to explore possible energy routes for the future and potential changes that it can make. It highlights areas
the company needs to focus on to ensure that it is able to conduct its business in an environmentally friendly and sustainable way. The
company has made changes as a result of its scenarios. For example, it entered the renewables market in 1996. With this study both paths
highlighted the potential importance of hydrogen. Shell’s hydrogen business has used the information from the scenarios to look at areas it
could develop further.
Société Générale (page 1)
Meeting Subjects Discussed
Canary Wharf John Garwood One/One Meeting Canary Wharf is well advanced in the implementation of environmental and
(Head of Detailed environmental community policy in the major developments they have been undertaking. The
Health Safety meeting latest phase of the Canary Wharf project demonstrates that the company are
and trying to minimise impacts by incorporating changes and use of materials at the
Environment) building design stage.
Chelsfield Julian Hart One/One Meeting Unlike Canary Wharf, Chelsfield has poorly developed policies and
(Head of Detailed environmental management systems at the corporate level. They have had to conduct
Health Safety meeting environmental impact assessment where this has impacted developments they
and have undertaken but have not systematically included in the planning and
Environment development stage. Julian Hart has been employed to put into place corporate
policies and we will monitor progress in this area.
BHP Billiton Ian Wood – One/One Meeting At the last meeting Billiton talked about policies, targets and management
Vice President Detailed meeting on CSR systems the company were planning to put in place to manage environmental
of Sustainable programme and progress impacts. Since the merger with BHP which is more advanced than Billiton than
Development since meeting in 2001 managing risks related to CSR, the company have introduced 21 standards
Matt Taylor – relating to from policy, leadership and commitment to product stewardship. The
Govt & company have set out some ambitious targets to achieve best practice and we
Community will be monitoring progress on achievement of standards and targets.
Anglo John Groom One/One Meeting At the last meeting, the company had just started developing central policies on
American (Head of Detailed meeting to discuss HSE. Since than they have published a detailed report on policy on HSE,
Health Safety progress on environmental community and other social/ethical issues. It is clear both from our meeting and
and implementation since last the report that the key focus for the group has been to ensure that it has
Environment) meeting in 2001. addressed community issues in its key geographic base in South Africa. Social
and community issues are particularly pertinent in the context of the Minerals
Bill and the charter to address black economic empowerment.
Société Générale (page 2)
Meeting Subjects Discussed
Wood Group Allister Some of your upstream Wood Group have a good track record in HSE in the North Sea and this has
Langlands clients such as BP and Shell helped them secure international contracts with clients such as BP and Shell.
(Dep Chief say they specify strict There are costs associated to fulfilling these requirements but these are
Executive requirements on the HSE factored in and they are in a good position to execute these contracts.
Officer) front on outsourcing contracts
Alan Semple – who bears the cost and are
(Grp Finance these priced in?
SIG David Williams How much does regulation There are two drivers on the regulatory front – building control & regulation and
(Chief impact demand for your better environmental performance relating to thermal, acoustic and fire
Executive) products? prevention. From April 2002, thermal requirements have changed and requires
Gareth Davis much higher standards for houses and new construction which should help
(Finance their products.
Director) Do you have any legacy Regulation of health & safety of the industrial sector has also helped demand
issues related to asbestos? for their industrial insulation product.
They have had asbestos claims from a small contracting business they owned
in the 60s. 20 ex employees have made claims – 2/3 of these have been
dropped because of the weakness of their case. 7-8 claims have been settled
for less than £10,000 each and all paid out of insurance. They have strong
insurance policies in place which can pay out to a max of £25 m per case with
no limit on the number of cases. This is an issue that they have checked
rigorously particularly as they recently raised $120 m recently through a US
Société Générale (page 2)
private placement where investors were focussed on this issue.
Société Générale (page 3)
Meeting Subjects Discussed
Shell Douglas This was a group Shell have developed two central scenarios based on achieving a stabilisation
International McKay (Senior presentation held at HSBC toof carbon emissions in the atmosphere at 550 ppm ( a number used often in
Energy discuss the long term energyissues surrounding climate change as critical). In developing these scenarios,
Analyst) & scenarios that Shell have the company has considered critical factors such as resource constraints,
Mike Harrop developed to guide their technology and social and personal priorities. In addition, they have considered
(Group thinking on the long term factors such as demography, incomes, urbanisation and liberalisation. Their
Investor prospects for the energy first scenario looks at a more regulatory led scenario based on resource
Relations) market. scarcity, environmental consideration and issues on security.
The second scenario looks at a technological and consumer led development
The purpose of the meeting in energy use.
was to understand the basis Both scenarios are out to 2050 and would imply a continuing of Shell’s existing
on which the scenarios had strategy to move to gas away from oil. Both also justify the company’s
been developed and question investments in renewable technologies.
the company on how it will The presentation reinforced our view that Shell are thinking about the strategic
develop its own business implications for their business as a result of climate change.
given their two central
Persimmon One/One This is the second detailed Persimmon have taken a much more pro-active approach to managing
Homes meeting engagement meeting with the environmental and community impacts since we first raised this issue with them
Mike Killoran – company since November 18 months ago. The management are very focussed on efficient management
Finance 2001. and have had informal initiatives in place to cut out waste. They have now
Director decided that they need to formally audit and report on these issues. Key areas
of focus for them are procurement and design improvement.
Société Générale (page 4)
Meeting Subjects Discussed
BG Group Charles Bland Group Seminar Held at HSBC HSE management is perceived as a strength at BG – they have clear targets
(Executive for performance, take into consideration carbon impacts in decision making and
Vice President Subjects Covered: use HSE as one of the factors in evaluating the performance of management.
Policy & Corp - Business Principles Other challenges more on the ethical side that face the company relate to how
Affairs) - Health, Safety and they deal with facilitation payments in securing contracts and how these are
Carey Francis Environment disclosed. They also operate in politically sensitive regions such as
(Head of - Human resources, Kazakhstan.
Community community involvement
MMO2 Mike Short – Group Presentation The Stewart report found no health concerns from mobile phone masts or
Vice President handsets. MMO2 in their presentation focused on the development of mast
Technology Subjects Covered: technology and highlighted how community consultation processes, site
- Development of Mobile sharing, open site databases and design issues have improved the company’s
Phone Masts ability to site masts without public controversy.
- Planning Issues
- Health Research
Deutsche Asset Management (page 1)
Stock Meeting attended by Subjects Discussed
Balfour Beatty Director Corporate Communications SRI update
Director, Health, Safety and Environment
The company is in the construction business, although 30% of its business is in fact in support services. BB is undergoing a major
procurement initiative on its supply chain and its previous 24,000 suppliers have now been reduced to less than 10,000. The company
appoints preferred suppliers and expects these suppliers to have similar work ethics to its own. The reduction in the number of suppliers used
helps this to be achieved.
The company has established a Business Practices Committee that reviews Group policies, practices and performance in regard to health and
safety, the environment, human rights, ethical business behaviour and general reputational issues. This is a sub-committee of the Board that
meets three times a year to review environmental performance and is composed entirely of non-executive directors.
The whole company operates a system of Risk Management which assesses the risks of all new projects before they are accepted. The
company will turn down a project if it does not meet with its standards. We suggested that the company include a real risk assessment
scenario to its next report so that it is possible to judge how stringent this assessment process is.
Despite all of these positive moves forward, the company admits that stakeholder engagement is not one of its strong points but that it is
gradually improving on this, similarly it is aiming for improvement on its external benchmarking qualifications. Not only does this
benchmarking system prove to stakeholders and customers of BB’s commitment to environmental issues, but it also allows the company to
pinpoint its areas of weakness enabling improvement.
A very informative meeting during which the company took our comments on board for any improvements to its developing systems and
Deutsche Asset Management (page 2)
Stock Meeting attended by Subjects Discussed
H&M Environment and CSR Manager Environmental and CSR update
H&M gave a brief overview of the company which has stores in 14 countries and does business with 900 suppliers and sub-contractors.
H&M published its code of conduct in 1997 which was developed in conjunction with Non Governmental Organisation’s and is based on the
United Nation’s and International Labour Organisation’s conventions. The Code includes issues such as child labour, freedom of association
and working hours and wages. H&M works with its suppliers to eradicate the problem of child labour and supports a scheme where education
is arranged for children and paid for by the supplier who then compensates the family for the loss of income from that child. This enables
children to receive a proper education to then find work in a factory.
H&M continuously assesses its suppliers and inspections are made annually with unannounced visits to those that are local. Each is graded
in terms of its Code of Conduct and must sign a commitment policy. Failure to do this will result in a block on the use of that supplier.
H&M is aware that it needs to be transparent in its reporting and is currently seeking a way of publishing and evaluating its report. H&M
participates in various initiatives such as the Global Compact, The Swedish Partnership for Global Responsibility, Amnesty Business Group,
Business for Social Responsibility and FTSE4Good. We questioned whether H&M had targets in place in order to help it track its
improvement. Although the company does not set specific targets it aims to improve from year to year by deciding on a particular area to work
The company deals with important issues for clothes retailers such as child labour, working conditions, hours of work and wages.
Improvement could be made on the available reporting of the company’s initiatives and achievements. Target setting would be helpful to
measure its progress.
We have only a small holding in the stock.
Deutsche Asset Management (page 3)
Stocks Meeting attended by Subjects Discussed
Shell Senior Energy Analyst Scenario development
Since the 1970s Shell have been developing scenarios which challenge the assumptions of the energy business. These scenarios help the
company to focus on critical uncertainties and help management to plan for the future. Scenarios are alternative stories of how the world may
develop, but are not predictions. Their purpose is to consider the forces that may push the future along different paths.
The main contributors to the shaping of long term energy are demography, incomes, urbanisation and liberalisation and the three critical
elements are resource constraints, technology and social and personal priorities.
One scenario includes societal pressures for secure, clean and sustainable energy which pushes a direct path to renewables, supported by
gas in the medium term. However, renewables are only possible after advances in energy storage. Working towards a renewables dominant
electricity and liquid fuels world.
The second scenario is based on consumer demands for more convenient, flexible and independent fuel, supported by advanced hydrocarbon
technologies. Working towards a fuel cell dominant hydrogen economy.
These scenarios have been created to help think through climate change. They are not strategies but provide a context for much more
Since the mid 1990’s, we have been concerned by the pace at which the major oil companies have embraced issues of sustainability. We
believe Shell to be amongst the leaders in the pack on this issue. The major driver of the share price, however, will be growth in production
Anite Group-Shareholder Resolution 3 to re-elect Finance Director
We voted against the re-election of Simon Hunt as Finance Director on two
First, this director was employed under a two year rolling contract, which does
not comply with best practice under the Combined Code.
Second, as a business issue, the Anite share price had recently suffered a
significant fall. This was as a result of exposures the company had incurred in
structuring past acquisitions. These structures could have led to significant
dilution to existing shareholders. Whilst we believe the company may have put
into place these structures based on the advice of its investment bankers, we
would have expected the Finance Director to take the ultimate judgement.
Our decision to vote was taken after discussions with Alec Daley, the
Chairman and consultation with other large shareholders. The vote was not
tested as the Finance Director resigned shortly before the AGM.
Following the AGM, another detailed meeting was held with Alec Daley and
Graham Galeb (Chairman of the Remuneration Committee). The meeting
chaired by Gillian Lakin, our analyst on the sector, was held to discuss more
fully how decisions had been taken by the board in making and structuring
acquisition decisions and also in setting remuneration.
Questions raised by Gillian included:
- When was the Board aware of the problem with the way the
acquisitions were structured?
- What was the degree of board awareness at the time agreements were
- How was directors’ remuneration set?
- Why was the bonus scheme based on pretax, rather than earnings per
- Given the problems with the structuring of acquisition agreements,
what reassurance can the company give that the accounts have been
prepared on a conservative basis?
The meeting reassured us that the board was taking the right steps to improve
the situation. The board is in the process of appointing a new Finance Director
and we are expecting news on this front when the company announcement
with their results in December.
Société Générale Asset Management
Deutsche Asset Management and Harvey Nichols Group plc
One of our fiduciary duties is to protect our clients’ interests as shareholders. To this end we are
proactive in terms of our stance on corporate governance. On many occasions this pro-activity attracts
little attention. In the example below, however, DeAM has received much attention for its actions in
relation to a take-over approach for Harvey Nichols Group plc.
We understand our duty to you to provide superior financial performance and are confident that our
actions in respect of Harvey Nichols will enable us to deliver this over the long term.
In recent weeks there has been a substantial amount of press attention focusing on Deutsche Asset
Management’s holding in Harvey Nichols Group plc.
Our position in Harvey Nichols Group has been built up since the company’s flotation in 1996 and
equates to 14.9% of the company. The holding is worth some £17m and makes up approximately 2.5%
of both our Genesis Fund and UK Smaller Companies Fund.
Offer for the company
The reason for the press attention surrounding our holding is as follows. On 18th September 2002 an
offer was announced for Harvey Nichols Group by Broad Gain UK, an investment vehicle owned by
Dickson Poon (already 50.1% owner of Harvey Nichols Group). As the offer was structured as a
Scheme of Arrangement, its approval required 75% acceptance by unconnected shareholders, putting
Deutsche Asset Management in a position of control with circa 30% of the unconnected shares.
In forming our view on the merits of the proposal we were clear that our fiduciary duty obliges us to
protect the interests of our clients as shareholders. Our understanding of your interests can be
quantified in terms of risk profile and investment time horizon, which we take to be long term. In this
instant, we believe that the long-term interests of shareholders are not best served by accepting the
offer by Broad Gain UK.
By our valuation criteria Harvey Nichols has the potential to create substantial value for shareholders
as it invests in its regional store roll-out programme. The benefits of this investment are not recognised
by the bid for the company at 250p. Clearly, there is a balance between the long-term prospects for
value creation and the current volatile trading conditions being seen at Harvey Nichols. For this
reason, we acknowledge that the shares may slip below the offer price for a time should the offer lapse.
We expect, however, that this will be more than made up over the next few years.
On November 1 we wrote to the directors of Harvey Nichols and issued a statement to the Stock
Exchange notifying them of our intention to vote against the Scheme of Arrangement. On November
11 the Scheme was duly defeated in a Court meeting and the offeror announced a restructuring of his
proposal, this time as a general offer. We believe the offer continues to under-value the company, but
are concerned about the possibility of the company being de-listed. We remain supportive of the
company’s management and of its prospects and have communicated this to the directors.