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Investor Responsibility Bulletin Company Engagement and Voting Reports January to March 2005 A response to the supposed ‘governance backlash’ 1 Insight’s response to the Operating and Financial Review 2 Company engagement summary 3 The potential financial implications of the proposed EU Chemicals Regulation (REACH) 4 Promoting good governance of health and safety 6 Trends in remuneration 7 Update: The Myners Principles on activism 8 Credit: 3rd photo from right: Colin Cuthbert / Science Photo Library. Insight hosts meeting on ‘Business and the 2010 Biodiversity Challenge’ 9 Revenue transparency and the resource curse 10 Just Pensions’ Construction and Building Materials Sector Note 12 Corporate responsibility: from policy to performance 13 Can corporate responsibility cut red tape? 15 Views expressed in this document are those of Insight Investment and should not be attributed to our parent company HBOS plc. The Investor Responsibility team 16 ...on the lighter side 16 Insight Investment: a responsible investor 16 Company engagement report 17 Noteworthy voting recommendations report 25 Delivering Investor Responsibility Welcome to the Spring 2005 issue of the Investor Responsibility We welcome your feedback and the opportunity to discuss any bulletin. This issue covers engagement with companies of the topics raised. Please feel free to email us at conducted by Insight's Investor Responsibility team on behalf of email@example.com. our clients between 1 January and 31 March 2005 to promote more responsible business practice by both investors and companies. We hope that you will find this issue of interest. This bulletin is not a complete report of Insight's overall Dr. Craig Mackenzie engagement with companies, which also includes a large number Head of Investor Responsibility of meetings between company executives and Insight's fund managers and analysts. These meetings are not currently the subject of a public report. CORPORATE GOVERNANCE A response to the supposed ‘governance backlash’ There has recently been much comment on how the UK listing authority. Thus, they apply to all companies, quoted sector has become unattractive to executive, and irrespective of how they are financed. One would expect any indeed non-executive, talent. Writing in the Evening Standard provider of business capital to want the comfort of an (22 February 2005), Anthony Hilton set out some of the the appropriate oversight mechanism, to ensure that the difficulties of attracting chief executives. Earlier in January, investment is suitably protected and used. Financial Times article on PWC’s annual global CEO survey Integrity of accounting is applicable equally to unquoted as highlighted the finding that ‘UK executives were more to quoted companies. We argued in our OFR submission (see inclined to regard governance, risk management and article on page 2) that large private companies should be compliance activities as a waste of time than managers obliged to prepare an operating and financial review, and, in any other country’. although the final regulations did not follow this line, there is This prompts two important questions: first, is it the case no reason why owners of private businesses should not ask that talent is being discouraged from working in the quoted for something similar. sector, and, second, do investors have a role to play in Hence, we do not concur with the view that the regulatory ensuring that this does not happen? It would be unfortunate burden is significantly greater on UK quoted companies. if the positive work that has been done by companies, investors and the government in improving the governance of UK-quoted companies has had the unintended The nature of the job consequence of driving away talent. Potential executive and non-executive appointees also show some trepidation related to the increasing perception that What might the disincentives be to working for, and the independent director’s role is that of policeman, principally being a board member of, a quoted, as opposed supervising compliance with regulation. Potential to a private-equity-backed, company? independent directors see this as a less interesting and rewarding role than that of a traditional non-executive – Is the regulatory burden really greater? and executives shy away from being policed. Let’s start with the supposed greater regulatory burden. The Although there is some legitimacy in this concern, we bulk of regulation – the take-over code, on health and safety, believe that independent directors play a vital monitoring environment, employment or, within our own industry, that of role, particularly through their membership of the audit and the FSA – applies equally to quoted and unquoted businesses. remuneration committees. It is vital in the UK’s board system Even when it comes to setting the rules that govern how that all directors retain responsibility, not just for compliance, quoted companies operate in the UK, institutional investors but also for strategy and its implementation. have generally supported a principles-based, voluntary One of the ways in which Insight promotes such an approach approach, as exemplified by the Combined Code. Companies is through integration of governance considerations into our were extensively consulted in drawing it up; they then agreed, investment process. We are not shy of asking executives voluntarily, to either comply with the code or explain why they questions on governance issues and, equally, in our meetings deviate from it. This is a much more flexible approach than the with chairmen and independent directors, we often go more burdensome, prescriptive regulatory approach. The only beyond traditional control issues. We have recently observed exception where listed companies face extra requirements is an increase in the number of annual board appraisals taking in the area of ownership rights (for example, companies are place, in large part due to the suggestion made to undertake required to consult shareholders about big deals, as required such appraisals in the Higgs review. Although initially in the ‘class tests’ of the listing rules). questioned by a number of directors, we believe that these Further, in the UK, directors’ responsibilities are set out in appraisals are playing an important part in ensuring company law (which is currently being reviewed), not by the appropriate board composition and behaviour. 1 The degree of scrutiny Conclusions This leads us to what we believe may be a genuine concern Overall, we believe that many of the arguments put forward of those operating in the quoted arena – the level and nature against being a director of a UK-quoted company are of scrutiny, by the media in particular, of companies’ reports, overstated. However, negative perceptions about the role, including those relating to pay and rewards. Appropriate, often based on misunderstanding of the regulatory burden intelligent and informed comment on such issues would and nature of the job, have created barriers. surely not discourage good candidates from taking up directorships. Unfortunately, remuneration remains an As investors in the quoted sector, it is important that we do emotive issue that sells papers and press coverage of it can not put ourselves at a disadvantage relative to other be simplistic and, on occasions, close to prurient. We are providers of capital, either through our own demands as therefore more sympathetic to directors’ reluctance to join owners or by supporting inappropriate government public companies on these grounds. interference. Our role is to help create the conditions in which talented individuals are willing to take up directorships An additional and related concern voiced by some directors and to do their jobs effectively. To date, in our view, investors is their fear that their earnings potential may be limited in the and listed companies have worked well together – and quoted arena, as investors, fearful of negative press should continue to do so – and have thereby avoided the coverage, may be unwilling to support potentially large introduction of populist over-regulation of the kind that is packages. However, in our experience, in industries where causing so many problems in the US. there is competition for talent from outside of the quoted sector, investors have shown the same flexibility as they have where there is international competition for talent. In such cases, they have been willing to support the level of reward necessary to attract the right person. The house building and retail sectors are recent cases in point. PUBLIC POLICY ENGAGEMENT Insight’s response to the Operating and Financial Review This year, the publication of an Operating and Financial I Insight would like companies to report against several Review (OFR) becomes mandatory for 1,300 listed UK KPIs that they believe to be particularly relevant to their companies with financial years beginning on or after 1 April business and to explain why these are important. 2005. This means that alongside the report and accounts, However, we believe that it is too soon to develop company directors will be required to provide their view of prescriptive guidance on KPIs. We feel that the examples all trends and factors that might affect their company’s the ASB included in its Reporting Exposure Draft were current and future development, performance and position. premature. There is a significant risk that these indicators will be seen as a ‘mandatory’ set against which companies In December 2004, The Accounting Standards Board (ASB) should report, rather than encouraging the development issued a document entitled ‘Reporting Exposure Draft’ that of KPIs relevant to their business. provides guidance on the general principles that should underpin OFR reporting and examples of the key performance I Further, new risks and issues inevitably emerge over indicators (KPIs) that companies could consider using. time (a good example is the increased investor focus on pension fund liabilities). The danger with prescriptive lists Insight responded to the ASB’s draft report, expressing of indicators such as those in the implementation guidance strong support for the UK Government’s decision to introduce is that they tend to be difficult to extend or amend in the OFR. We believe that the OFR, which requires companies response to changing conditions. Thus, a more sensible to present both financial and non-financial information, approach, in our view, is to wait until the end of the first will play a vital role play in helping shareholders to better OFR reporting cycle to review whether there is a need for understand companies, particularly how market and other the ASB to provide specific examples of KPIs. factors are likely to affect their future performance. We made During 2005, Insight plans to hold extensive discussions with several specific points: companies to clearly articulate our view of the nature and I We believe that OFRs should be bespoke documents content of OFRs that we believe will be valuable for that explain each company’s unique view of its prospects institutional shareholders. over the longer term. In our view, the OFR will fail if it engenders standard reports that use bland ‘cut and paste’ language, as these will not give shareholders any new insight into companies’ performance or their views on critical business issues. 2 ENGAGEMENT STATISTICS Company engagement summary The table below provides an overview of the engagement On behalf of our clients, Insight holds shares in 80% that the Investor Responsibility team conducted with of the companies in the UK FTSE All Share Index. Of those, UK companies in our portfolios on behalf of our clients during this quarter, we engaged with 62 companies from 1 January to 31 March 2005. A detailed list of all our representing 11% of our clients’ holdings by number engagement with companies is available at the back of or 43.3% by value. In addition, we voted on 749 this bulletin. resolutions at 84 company meetings. ISSUE OBJECTIVE COMPANIES ENGAGED WITH DURING THE QUARTER TOTAL Biodiversity To encourage companies to minimise their BG, Lonmin, National Grid Transco, Premier Oil 4 impact on biodiversity and support implementation of the Convention on Biological Diversity. Board of Directors To ensure an appropriately constructed Board Amvescap, Barclays, De Vere, Grainger Trust, Imperial Chemical 11 that is able to conduct effective stewardship of Industries, Marconi, Marks & Spencer, National Grid Transco, our investment. Rio Tinto, Rolls-Royce, Vodafone Board To ensure that Board remuneration levels are Alliance and Leicester, AMEC, Barclays, BP, British Airways, 24 Remuneration justified and that rewards are linked to corporate British American Tobacco, BT, Cattles, Friends Provident, and individual performance. Gallaher, HSBC Holdings, IMI, Intertek, J Sainsbury, John Laing, John Menzies, Land Securities, National Express, Next, The Peninsular and Oriental Steam Navigation Company, Senior, Serco, Spirent, Taylor Nelson Sofres Climate To encourage companies to effectively manage British Airways, National Grid Transco, United Utilities 3 Change climate change risks. Corporate To establish and maintain investor confidence in British Airways, BT, Carnival, Millennium & Copthorne Hotels 4 Governance - the Board. Miscellaneous Corporate To encourage improvement in the overall BG, BP, GUS, Lonmin, National Express, Shell Transport & 7 Responsibility (CR) framework for the control, management and Trading, Unilever Governance reporting of corporate responsibility in companies. Customer-Related To encourage companies to identify, evaluate Cadbury Schweppes, J Sainsbury, Marks & Spencer, Somerfield, 5 Risks and effectively address customer-related risks. Tesco Health and Safety To promote high standards of health and safety. AWG, Barclays 2 One Million To encourage companies to adopt more Redrow 1 Sustainable Homes sustainable policies and practices. Revenue To support development of an international BP, Shell Transport & Trading 2 Transparency revenue transparency mechanism through EITI - the Extractive Industries Transparency Initiative. Strategy To ensure that the company's strategy is fully Rathbone Brothers, Shell Transport & Trading 2 explained and is in the interests of its shareholders. These figures were calculated as at 31 March 2005. They include Insight’s equity share holdings in companies listed in the UK FTSE All Share Index, but exclude shareholdings in companies held by unit trusts and open-ended investment companies (OEICs) not managed by Insight. It is Insight’s policy to support good practice and challenge poor performance in relation to corporate governance and corporate responsibility. Company presence on this table does not automatically indicate that Insight has a concern. Source: Insight Investment 3 INVESTMENT RESEARCH AND ANALYSIS The potential financial implications of the proposed EU Chemicals Regulation (REACH) Introduction Potential investment implications Several years ago, the European Commission (EC) recognised Insight originally identified the potential for REACH to that data on chemical hazards and the chemical contents of significantly impact on company valuations in 2003 (see products on the EU market was lacking. It therefore proposed the page 13 of our Spring 2004 Bulletin). We identified the main Registration, Evaluation and Authorisation of Chemicals (REACH) earnings implications of REACH as relating to: market loss regulation, which takes a ‘no data, no market’ approach to (i.e. it is possible that certain chemical lines would have chemical control. The regulation also seeks to reverse the ‘burden to be discontinued); input material loss (where certain raw of proof’ of identifying chemical risks away from regulators, ingredients or processing chemicals may no longer be towards companies, who will have to demonstrate the safety of available); its potential to stimulate innovation and create chemicals in order to maintain their licenses to sell them. new market opportunities, and; litigation risk (as REACH proposes a greater level of public access to testing data). REACH is still in draft form but expected to come into force in 2006. From that date, any chemical produced or marketed in any quantity over one tonne per annum (tpa) in the EU will be subject Insight’s research to REACH. The regulation is expected to be progressively During 2004, Insight conducted a survey of the European implemented over 11 or more years, and will, ultimately, lead to chemicals sector to assess the potential impacts of REACH the creation of a complete inventory of the chemicals on the EU (see page 17 of our Summer 2004 Bulletin). We concluded market. With around 30,000 substances included in its scope, that, with a few outstanding exceptions, many companies the regulation potentially covers several hundreds of thousands were unprepared for the introduction of REACH. In addition, it of intermediates, over one million formulations and, conceivably, was clear that the financial impacts of REACH were very poorly well in excess of one million finished products. understood. As a consequence, Insight engaged the Centre for Environmental Strategy (CES) to work with Insight’s research analysts to develop a better understanding of its potential impact. CES’s research included a desk-based analysis of the product ranges for the 19 chemical companies covered by Insight’s UK and European analysts to estimate company-specific REACH compliance costs for registration and increased processing costs, as well as an assessment of company preparedness to comply with the legislation. Given the difficulty of assessing the economic effects of such a complex regulatory regime, a set of simplifying assumptions was devised. In particular, as REACH is in draft stage, projected costs were assessed based on an estimation of the most probable regulatory demands. CES study results The specific impacts of REACH will be highly dependent on company product portfolios. Companies producing base petrochemicals or gases will have the fewest number of substances to be registered under REACH. Conversely, the production of fine chemicals generally involves a high number of substances at low tonnages, even when considering research and development (R&D) exemptions. Specialty chemical portfolios typically consist of a large number of medium volume substances spread across diverse product ranges. Most of the surveyed companies produce between 500 and 2,000 substances that will be subject to REACH, with one company producing around 6,000 substances. For most of the companies surveyed, products exempt from the REACH process, such as active ingredients in pharmaceuticals or plant production products, typically correspond to 50-90% of company sales. Credit: Colin Cuthbert / Science Photo Library 4 Table 1: Projected REACH registration, processing and reformulation costs for 10 companies* Air Liquid Bayer British Ciba Clariant Degassa DSM Givaudan ICI Yule Vita Catto Registration (M) 3.0 125.1 3.3 19.5 26.2 16.5 9.0 0.6 22.0 3.7 Processing (M) 4.5 0 29.7 71.6 62.7 71.3 61.5 0.1 72.5 9.1 Reformulation (M) 0 0 3.2 0 0 0 0 0 0 0 Total cost/sales 0.1% 0.4% 2.4% 2.1% 1.1% 0.8% 0.9% 0.04% 1.1% 1.5% Total cost/Earnings 0.9% 10.9% 66.7% 64.6% 26.2% 19% 20.8% 0.5% 20.2% 34.5% Registration/R&D 3% 5.1% 62.6% 10.5% 9.1% 4.5% 1.9% 0.4% 10.3% 19.8% Table 1 above illustrates the results of individual company An overview of the categories developed for the qualitative company estimated costs, based on ten companies involved in different evaluations is presented in Table 2 below with the results for seven chemical manufacturing activities. The projected costs are companies representing a diversity of market exposures. Each expressed here as the net present value over the total company product portfolio is comparatively described on a 3-point implementation period and are based on the most-probable scale in terms of its relevance to that company’s business activities (+ regulatory demands and implementation scenario. An 8% annual some relevance; ++ medium relevance; +++ high relevance). discount rate is applied. The present day value of future cost is compared to the company’s financial data for one year, yielding a Table 2: Qualitative evaluations for seven worst-case scenario of the potential financial impact that the companies* regulation may have on a company’s cost base. As compliance administration is anticipated to place significant demands on company R&D resources, registration costs were also compared Yule Catto Givaudan Degassa Clariant to current yearly company R&D expenditures. DSM Ciba Overall, the findings confirm the estimates of the EC and ICI environmental non-governmental organisations (NGOs) that the total direct costs of REACH during implementation will typically Product Portfolios be around or below 1% of a company’s annual turnover. However, the total registration and processing costs, when expressed as Speciality + Industrial +++ ++ ++ ++ + +++ +++ lump-sum figures in present day value, often represent between Chemicals 20% and 35% of one year’s profits. Furthermore, from the companies shown in Table 1, registration/R&D cost-resource Fine Chemicals + ++ ++ ++ ++ + + ratios may be as high as 10% in Ciba, Clariant and ICI, 20% in Medium & High Volume Yule Catto and 63% in British Vita. ++ +++ ++ +++ + ++ + Chemicals It should be emphasised that REACH is in draft format and the Market Sales & Impact Categories above figures are estimates based on a series of assumptions. Moreover, the figures do not include the benefits to market Sales Outside Scope of incumbents associated with, for example, the increased barriers + + + +++ +++ ++ + REACH to entry into chemicals manufacture that REACH represents. However, if the above cost estimates prove broadly accurate, Production inside EU ++ ++ ++ +++ ++ ++ +++ implementing REACH may significantly affect some companies’ cost base and their future valuations. REACH therefore appears Low Sales Impact Category +++ +++ +++ ++ + ++ +++ to pose a material risk to some of the companies surveyed. As REACH will grant companies time periods of between three High Sales Impact Category +++ +++ +++ + +++ +++ ++ and five years to register their products, company preparedness to implement REACH, and their ability to secure early product Preparedness registrations, may prove crucial to those seeking to benefit from changes in the EU chemical market. Several of the companies Rating (Q2/04) High Med High Low Low Low Med surveyed were found to be taking systematic organisational steps (low, med, high scale) to respond to REACH (e.g. establishing REACH governance committees, creating central databases, reviewing product The results shown in Table 2 illustrate the diversity of the portfolios, screening dangerous substances and establishing exposure of these companies. Consequently, the potential new communication networks with suppliers and customers). impacts of REACH are expected to vary considerably between Conversely, several companies did not appear to either companies, with Ciba and Degussa scoring particularly well be very knowledgeable or concerned with REACH. relative to the other companies. 5 Combining the company data on the number and volume The business impacts of implementing REACH are expected to of chemicals produced, with the qualitative descriptions of depend largely on a company’s ability to control or respond to the company profiles and preparedness, enabled the final the five factors set out in Table 3. Altogether, different business overall assessment of business impacts. Transposed into a impacts may have a ‘balancing’ effect within a company. For 10-point (qualitative) scale, the comparative business impact instance, while Yule Catto may experience difficulties with its indicators for seven companies are provided in Table 3. ability to internalise costs, it appears better able to pass costs on Increasing degrees of impact are indicated by a progression to its customers, due its focus on specialist high-value products. of shading from green to amber and then orange with lower In comparison, Givaudan’s potentially limited ability to pass scores indicating greater impact. costs on may not prove financially significant, it will likely be able to internalise costs due to its low cost/earnings ratio Table 3: Aggregate business impact indicators* and a large proportion of its market sales are exempt from REACH. Insight will be closely following the response of Yule Catto Givaudan Degassa European companies to REACH, especially in terms of Clariant Business impact element DSM Ciba (10 point scale) preparedness and promoting chemical safety. ICI Cost Internalisation 3 3 3 7 10 8 3 Conclusions Overall, the analysis allowed Insight to assess the potential Pass-on Costs 9 8 8 7 4 7 7 financial impacts of the proposed REACH regulation on its Overcome Market Obstacles 10 8 10 5 3 5 7 investments in the European chemicals sector. The analysis indicates that the impacts of REACH are likely to vary Realise New Markets 8 7 8 4 7 6 6 significantly between companies, showing that, unless Maintain International changes are made to the level of preparedness, REACH may 5 6 6 8 7 7 5 affect the profitability of some listed companies. However, Competitativeness the costs to the industry are still subject to change and the * The figures presented in these tables are derived from a desk- impact of REACH on company valuations will only become based review of publicly available information. They have not clear once there is regulatory certainty. been supplied or confirmed by the companies in question. CORPORATE GOVERNANCE Promoting good governance of health and safety Insight has long been concerned with ensuring that sufficiently strategic issue, it should report against relevant companies meet the highest health and safety standards and KPIs – something that recent changes to Company Law adopt best-practice management, reporting and incentive require for the 2005-6 financial year (see page 2 for a related systems to enable them to do so. Indeed, we believe this to article on the requirements of the new Operating and be a critical element of good governance of corporate Financial Review). The forthcoming HSE Corporate Health and responsibility for many companies. Safety Performance Indicator (CHASPI) index may provide a useful starting point for companies when considering which In February this year, Insight hosted a conference in KPIs to adopt. (See page 10 of our Summer and page 2 of our conjunction with the Health and Safety Executive (HSE) and Autumn 2005 Bulletins for more details on CHASPI.) the Institute of Directors (IoD) to highlight the important issue of the need for strong director leadership in Occupational One question debated was the extent to which directors’ Health and Safety (OHS). A series of case studies of best remuneration should relate to OHS performance. Insight put practice in this area was presented that demonstrated both forward the view that it would be appropriate to incorporate the financial and OHS benefits of strong leadership. Anchor elements of OHS performance into performance-related pay Homes, the British Broadcasting Corporation, Debenhams, agreements for directors in companies where OHS is a The Environment Agency, Esso, Hilton UK & Ireland (part of strategic risk to the business – particularly for executive Hilton Group plc) and Zurich were companies highlighted in directors and the board director with delegated responsibility the case studies. (The full HSE case studies are available at for OHS. However, we also believe that it would be www.hse.gov.uk/corporateresponsibility/casestudies.) Key inappropriate for independent non-executive directors to findings were that strong leadership has resulted in greater receive performance-related pay, of any kind, as this would employee involvement in OHS matters and, crucially, a compromise their independence. We also noted that reduction in the number of accidents and injuries. considerable care should be taken when considering what kind of incentives to offer in this regard, as there are pros and In its presentation, Insight chose to focus on the role of the cons related to both output and outcome-related metrics and board of directors with respect to promoting leadership on considerable scope to create unintended consequences. health and safety issues. We set out our view that wherever OHS represents a significant risk for a company, we would Insight will continue its dialogue with companies to encourage expect the board to be able to demonstrate that it had better health and safety governance. We also plan to support actively considered and signed off on the company’s OHS the HSE in disseminating ChasPI and to encourage companies strategy, policy and key performance indicators (KPIs). We to take up this valuable new tool to evaluate when it is available also suggested that where a board considers OHS to be a and to achieve high standards of performance on OHS. 6 CORPORATE GOVERNANCE Trends in remuneration In August 2002, the UK Government introduced the Participation in long-term incentive plans (LTIPs) requirement that companies seek annual shareholder driven by short-term performance approval for the directors’ remuneration report. Insight Short-term cash and restricted share bonuses have a welcomed this requirement, as it has improved shareholder legitimate role to play in rewarding directors’ short-term accountability by providing investors with the opportunity to achievements. Insight believes that long-term incentive plans vote to approve or reject remuneration schemes. Essentially, (LTIPs) are the best instrument to support long-term value shareholders’ principal concern is to ensure that directors’ creation within companies. However, LTIPs that measure remuneration packages are aligned with the interests of performance over a 3-year period must be properly designed shareholders. and structured. In the last few years, many companies have put forward We have concerns with schemes where the size of the reward inappropriate remuneration schemes. For example, in 2003, in long-term plans is driven by short-term performance. In shareholders rejected GlaxoSmithKline’s remuneration report particular, we are not in favour of schemes in which the very due to the proposed potential pay-out of £22 million to participation of directors in the LTIP depends on performance Jean-Pierre Garnier, over the 24-month contract period, in a specific year, such as those recently put forward by should he leave the company. Bradford & Bingley and Intertek. This is because we believe An integral part of Insight’s regular dialogue with companies that this structure can lead executives to put too much is consultation on proposed remuneration schemes emphasis on short-term performance and, in extreme cases, ahead of annual general meetings to prevent such disputes. encourage them to skew financial results to ensure maximum In these consultations, we have seen a number of common short-term bonuses and participation in the LTIP. We believe themes emerging: (a) the use of non-financial targets that the inclusion of executives in LTIPs should be automatic, in remuneration packages; (b) basic salary increases; such that even after a poor year, executives should have the and (c) over-emphasis of short-term drivers of participation opportunity to benefit financially from strong performance in in Long-term Incentive Plans. subsequent years. Given that LTIP pay-outs are based on directors’ performance over the previous three years, poor performance in any of the three years will automatically and Linking remuneration to non-financial targets rightly reduce the total reward. Companies are increasingly integrating non-financial targets related to customer satisfaction, employee issues, the environment, and health and safety into remuneration Conclusion schemes. We welcome this trend, as we believe that Five years ago, the remuneration proposals of many non-financial performance in these areas can be key companies were often inappropriate. In response, in recent financial drivers and therefore important to the long-term years, we have seen greater shareholder activism following business success of companies. There are several the introduction of the requirement to vote on the examples of this: BHP Billiton’s remuneration for executives remuneration report, as well as increasing media interest in incorporates key performance indicators on health, safety, directors’ remuneration. The combination of these two environment and employee; 15% of the short-term incentives elements has had a pronounced positive effect on both the of Vodafone’s directors are based on customer satisfaction level of disclosure in remuneration reports and in scores; BP has integrated health and safety targets as remuneration policies themselves. Insight welcomes these non-financial performance targets linked to real advances and continues to encourage, and take part in, performance into its remuneration scheme. constructive and open dialogue between companies, their advisors and shareholders on remuneration schemes. Basic salary increases The median basic salary increase last year for all full time executives in the FTSE 350 was 7.1% compared to 7.5% in 2003 and 9.7% in 2002 (in comparison, the average increase in the retail price index for 2003 was 2.9%). Salaries are the basic building blocks of remuneration; they also drive the level of share option allocations. Insight is concerned that basic salaries are continuing to increase against the market index, at a time when a consensus is emerging among institutional investors that directors’ remuneration should be composed of a fixed basic salary and a larger variable element. BT Group is one company that has taken this approach by fixing base salaries and incentivising directors through higher variable rewards. Insight supports this approach. 7 CORPORATE GOVERNANCE Update: The Myners Principles on activism In March 2000, the Chancellor of the Exchequer commissioned Further, the Treasury’s review highlighted the importance of the Paul Myners to conduct a review of institutional investment role of pension fund trustees in ensuring that the Principles are in the UK. One of the areas considered by Myners was incorporated into the mandates of fund managers. shareholder activism, where he recommended that trustees or their fund managers engage with under-performing companies. Reporting on activism The original Myners review argued that a good practice The ISC Principles model, backed up with disclosure on a ‘comply-or-explain’ In 2002, the Institutional Shareholders’ Committee (ISC) basis, could be a powerful force for behavioural change. (whose members are the Association of British Insurers, the It therefore proposed that pension funds report annually Association of Investment Trust Companies, the National on how they implement the Myners Principles and explain Association of Pension Funds and the Investment Management the reasons for departing from any of them. Association) issued its Statement of Principles on the The review found that disclosure to date has been patchy Responsibilities of Institutional Shareholders and Agents. The and, in general, less rich and informative than originally Principles were introduced in the hope that effective voluntary envisaged. In part, this may reflect the relatively weak shareholder action would prove regulation to be unnecessary. collective pressure that fund members are able to bring to The Principles require institutional shareholders to set out bear on trustees. There are signs that pressures to act on the their policy on activism, including details on how investee Myners Principles are mounting, due in part to growing trade companies are monitored, the policy for meeting with union and media interest in corporate governance. Over time, investee company boards and senior management, when partly in response to such pressures, commentary and they might intervene, and their policy on voting. They also disclosure is likely to improve. While the Government require institutional shareholders to report to clients and/or considers that there would be benefits in making progress beneficial owners on these activities. more quickly, it has decided not to require schemes to disclose their compliance with the Myners principles. Review of progress Instead, it has proposed that trustees should, voluntarily, issue an independently compiled report on implementation In December 2004, HM Treasury published a review of of the principles. The Government believes that this is a the implementation of the Myners Principles. The review more flexible approach than requiring mandatory disclosure. (reflecting the findings of the recent reports from the It hopes that the reports will contribute to providing an Department of Work and Pensions ‘The Myners Principles and informed commentary on the quality of compliance, Occupational Pension Schemes - Volumes 1 and 2’) concluded thereby helping to establish benchmarks of good practice that progress on activism has lagged behind other key areas. It on reporting, providing information to members and also noted that the Government had considered legislating for other stakeholders, and helping trustees to validate their shareholder engagement, but, following discussions with the decision-making procedures more effectively. ISC, had agreed to allow shareholders to pursue activism based on the ISC Principles and to assess progress, and the need for regulation, in two years time. Insight’s view Insight supports the voluntary approach proposed by the In its report, the Treasury noted that the Government believes Government. We recognise that a mandatory approach that effective engagement requires informed consideration could easily create a box-ticking environment aimed at and judgement and cannot be achieved by ‘box ticking’ achieving formal compliance with prescriptive rules. We undertaken simply to achieve formal compliance. Thus, the would prefer to see useful, effective activism that results in Government emphasised that investment managers should better corporate governance. However, the investment ensure that: management industry cannot be complacent if it wishes to I The ISC Principles have been integrated into their avoid further regulation; it must ensure that voluntarism investment decision-making and asset management works – and is seen to work. This requires that the industry processes. properly integrate the ISC Principles into investment decision- I making and management processes. It also requires that all The quantity and quality of resources and people fund managers, not just the small minority as at present, committed to engagement are sufficient. ensure that they commit sufficient resources, including I The level of qualitative reporting provided to clients and/or suitably trained or experienced people, to engagement, beneficiaries is sufficient. and that they report in greater detail about their activism. I An explicit strategy is set out, elucidating the Our experience with activism convinces us that it brings circumstances in which they will intervene in a company, substantial benefit to both companies and investors. It is the approach they will use in doing so, and how they therefore in the interests of individual fund managers and of measure the effectiveness of this strategy. the interests of the industry and market as a whole, that the ISC principles are fully adopted and effectively implemented. 8 PUBLIC POLICY ENGAGEMENT Insight hosts meeting on ‘Business and the 2010 Biodiversity Challenge’ policy process, through the CBD and dialogue with national policy-makers. Similarly, policy-makers felt they would benefit from materials that describe companies’ operations in different countries, to help them to engage with the private sector more effectively. Elliot Morley MP The participants also suggested it would be valuable to hold a workshop at which conservation experts could explain which UK Minister of State for geographical areas have ‘high biodiversity value’ so that Climate Change and Environment companies could focus their conservation efforts more effectively. The corporate representatives suggested that the Biodiversity and business development of a basic model for regional and landscape- Insight believes that investors have an interest in seeking scale decision-making and biodiversity conservation would to influence the direction and form of public policy on a assist them in setting priorities. Further, they indicated that wide variety of financial and non-financial issues, including guidelines on integrating biodiversity issues into supply chain biodiversity. Our experience from discussions with companies management would be valuable to those companies for which in a range of sectors increasingly leads us to believe that their this is an issue. I adoption of best practice policies and management systems Standard-setting. The development of a biodiversity on sustainable development issues help to secure their standard or benchmark that could be incorporated into license to operate and to protect their reputation. However, it investment processes or adopted by influential business is less clear how companies can engage in intergovernmental organisations was proposed. It was agreed that Insight’s processes that ultimately affect them, such as those of the biodiversity benchmark for extractive industries could be United Nations Convention on Biological Diversity (CBD). used as a basis for other benchmarks. Once generic The CBD commits its 188 parties to conserve biodiversity, biodiversity principles or standards have been established, to use its components sustainably and to share, fairly and these could then be used as a basis for developing sector- equitably, the benefits arising from access to genetic specific guidance and standards. resources. The treaty is implemented by governments, I Mainstreaming. It was suggested that biodiversity be through national regulations and policy, which can and do embedded within existing corporate reports, in the context affect companies’ costs and profitability in several sectors. of other sustainability issues. Further, more work should be undertaken to explore how biodiversity could be integrated Insight hosts international meeting with the CBD into annual financial and accounting disclosure rules, In March 2005, Insight hosted a meeting with the Secretariat investment indices, voluntary indices and reporting of the CBD, the UK Department for Environment Food and Rural standards, the accreditation process of key environmental Affairs (Defra), the Brazilian Ministry of Environment, the management mechanisms, and the investment decision- Brazilian Business Council and the World Conservation Union making processes of financial institutions. (IUCN). The purpose of the meeting was to develop ideas for I Scaling up. The private sector could play a greater role in engaging business in biodiversity issues, through the formal addressing biodiversity loss, it was suggested, if industry CBD process, or through voluntary business initiatives outside leaders on biodiversity were to relay its importance and that process, but in support of its objectives. The meeting their knowledge of how to integrate it into business was opened by Elliot Morley MP, UK Minister of State for Climate practices to other companies. Small and medium-sized Change and Environment, who expressed the UK’s commitment companies were highlighted as those in need of such to biodiversity and referred to the Government’s plan to achieve encouragement, as many are not aware of their a significant reduction in the current rate of global biodiversity biodiversity impact or deny that they have one. loss by 2010 – the target adopted by the CBD. In addition, it was proposed that good practice could be shared through industry associations, particularly using Meeting recommendations case studies. It was also agreed that all Parties to the CBD The meeting produced a wealth of specific suggestions as to should ensure that state-owned companies are addressing how companies, industry associations, investors, governments, biodiversity issues adequately, as they frequently fall far non-governmental organizations (NGOs) and the CBD itself behind private companies. could work more effectively with the business community and I Offsets. Participants recommended further exploration spread best corporate practice on biodiversity. Among the of the mechanics of biodiversity offsets and their potential principal conclusions and recommendations were: contribution to the 2010 target and referred to Insight’s I Awareness-raising. All parties would benefit from a recent work with IUCN on this subject (see page 14 of clear articulation of the business case for addressing our Winter 2004 bulletin). They mooted the idea that biodiversity. The business community felt it would benefit companies could make a joint commitment to ‘no net from further guidance as to how it might engage in the loss’ to help meet the 2010 target. 9 The participants also suggested that a workshop would be Conclusion valuable at which conservation experts could explain which The report from the meeting (see www.biodiv.org/doc geographical areas have ‘high biodiversity value’ so that /meetings/biodiv/b2010-01/official/b2010-01-03-en.pdf) will companies could focus their conservation efforts more be submitted to the CBD’s forthcoming meeting to review effectively. The corporate experts suggested that the the treaty’s implementation. The participants hope to meet development of a basic model for regional and landscape-scale again in Brazil to broaden the agenda and participation in decision-making and biodiversity conservation, involving local the debate. This should pave the way for a well-informed stakeholders, would assist them in setting priorities. Further, discussion by all the Parties to the CBD at their next they indicated that guidelines on integrating biodiversity issues conference in Brazil in March 2006 and help to unlock the into supply chain management would be valuable to those potential for business to help stem the unprecedented companies for which this is an issue. loss of biodiversity by 2010. NEWS Revenue transparency and the resource curse accusations of complicity in corrupt behaviour. These actions in turn may impair their individual or collective ‘licence to operate’ (locally or globally), render them vulnerable to local conflict and insecurity and even, ultimately, compromise their long-term commercial prospects in these markets. However, at present, most companies claim that they are prevented from making their payments public by a combination of confidentiality clauses in their contracts, the commercially sensitive nature of this information and by the apprehension of host governments of greater public scrutiny. (Some companies have, however, published certain payments, with mixed results. See page 2 of our Summer 2004 Bulletin for more details.) We believe that greater transparency of both companies’ payments to governments and of government revenue flows could contribute to achieving better governance in host Insight, along with other institutional investors, has countries. However, we also acknowledge that transparency substantial investments in extractives companies that operate alone is not sufficient; its effectiveness will depend on the in many fragile emerging economies. Despite – or as many success of wider initiatives, such as those led by the World argue, because of – the enormous resource revenues they Bank, IMF and other development agencies, to combat receive, such countries are often plagued by weak corruption and to build capacity in host countries to manage governance, poor transparency, crippling corruption and their vast revenues effectively. devastating conflict. They are therefore often referred to as suffering from the ‘resource curse’. Investor support for EITI continues to grow The risk to companies operating in these countries can be Insight believes that it is legitimate – and in their best interests – substantial. However, this risk can be ameliorated, and profits for investors to support initiatives that strive to create more and investment returns enhanced, if steps are taken to create stable, less risky operating environments. Thus, since October more stable, transparent operating environments, where the 2002, Insight has been supporting, along with other institutional rule of law, economic prosperity and social cohesion prevail. investors, the UK-Government led Extractive Industries Transparency Initiative (EITI) to promote greater transparency, and thus greater accountability, in countries that derive The role of companies in sound development substantial revenue flows from natural resource extraction. It is common practice today for extractives companies to make legitimate, but mostly undisclosed, payments of More specifically, the EITI aims to form partnerships with millions of dollars to governments in fulfilment of their host governments and to facilitate the creation of processes contracts, in the form of signature bonuses, royalties, fees within host countries to enable them to move towards and taxes. There is solid evidence that, unfortunately, in many full revenue transparency. In each country, this will require countries, billions of dollars of revenues are diverted from a unique mix of new legislation and regulation, institutional national budgets into private bank accounts. These funds are capacity building, consultative processes with the private therefore not used to pay for urgently needed health and sector and non-governmental organisations (NGOs), the social services, infrastructure development, and education – development of reporting protocols and standards and, economic development is held back. importantly, agreements on new ‘modus operandi’ with respect to corporate contracts for oil and gas extraction. It is argued that, by not disclosing such payments, companies are not only indirectly contributing to maintaining a high-risk In May 2003, a group of 10 investors, including Insight, business environment, but make themselves vulnerable to representing £466 billion under management, issued a 10 statement of support for the EITI, calling on oil, gas and mining Despite these relatively low scores, Shell and BP were ranked companies to be more transparent about the payments they 3rd and 6th, respectively. Both of these UK oil giants have make to governments. Investor support has grown exponentially been active supporters of EITI from the beginning. since then. Today, 59 investment managers from around the STC states that it published the reports to contribute to the world have signed up to the statement. In all, they manage debate about how companies should report their revenues to $8.3 trillion of assets. host governments and to try to accelerate that process. STC and others in the PWYP coalition argue that while they are Second EITI conference encouraged by EITI’s progress, they also want to see real and On 17 March 2005, the UK Department for International rapid progress in the private sector towards payments Development (DFID) convened a high-level conference of transparency and to ensure that the EITI does not become a signatories and supporters of the EITI to review progress and ‘talking shop’ and a substitute for real and rapid action. explore next steps, attended by nearly 300 participants from around the world, including outgoing World Bank president, Next steps to promote transparency James Wolfensohn, the Deputy Managing Director of the IMF Insight is very encouraged by the rapid progress being made Takatoshi Kato as well as numerous government ministers, by the EITI to attract host government and company support senior executives of global oil, gas and mining companies and for its aims. Further, we strongly welcome its work to drive NGOs. Conference delegates – including the NGO contingent – forward bespoke processes in each host country to develop more or less unanimously praised the progress EITI has made greater capacity to monitor and report on financial flows from since the EITI was set up less than three years ago and natural resource extraction and standards by which to do so. committed to continue to support it. Several countries and companies announced their intention to join EITI, adding to its While Insight has some reservations about the research and the strength and momentum. evaluation criteria, we believe that STC’s reports on host government and company performance on transparency are NGO proposes framework for measuring timely and make a valuable contribution to the debate. We corporate transparency hope that the proposed revenue reporting framework will be widely debated with companies and other stakeholders so as to Save the Children (STC), the global children’s charity, and a reach a consensus about which revenues should be reported, member of a broad, international NGO coalition pressing for and how. Regular benchmarking of progress by home revenue transparency (called the Publish What You Pay coalition governments and companies towards achieving full revenue - PWYP), used the opportunity of the conference to publish two transparency is also likely to stimulate action. We also hope to new reports. see a similar proposal emerge to track the progress of host One of the reports analysed how supportive of revenue country governments in achieving full public reporting of transparency the legal and regulatory frameworks are of 10 financial receipts from revenue extraction. OECD countries, home to many of the world’s largest oil and Insight will continue to actively support the formal EITI gas companies. Canada emerged as the country with the process and play an active role in the wider debate on strongest legislation on access to information, with a score of revenue transparency. We plan to meet with BP and Shell to 58%; the UK was second with a score of 49%. discuss their views on how they, and all extractive companies, The second report proposed a framework of criteria by which to might be encouraged to disclose more fully their revenue measure corporate reporting of revenues and other information payments to host governments, so as to support this strong related to extractive operations and bribery and corruption. global movement to lift the resource curse and bring greater Insight strongly supports the principle of monitoring and prosperity to millions of people in developing countries over evaluating the progress and performance of companies on the coming decades. revenue transparency. Insight was, therefore, pleased to be invited to join the multi-stakeholder Review Group for this project. About the EITI The Extractive Industries Transparency Initiative (EITI) was The performance of 25 global oil and gas companies, launched in September 2002. EITI aims to increase operating in six selected resource-rich developing countries, transparency of transactions between governments and was benchmarked against this framework. Companies were companies within extractive industries. Revenues from oil, assessed on the amount of information they publish on three gas and mining companies should be an important engine for elements of their activities: economic growth and social development in developing and I Corporate level anti-bribery and corruption policies. transition countries. However, the lack of accountability and transparency in these revenues can exacerbate poor I Factual data on the nature and size of their extractive governance and lead to corruption, conflict and poverty. operations on a country-by-country basis. Increasing transparency and knowledge of revenues will I Publication of payments made to host governments. empower citizens and institutions to hold governments to Talisman was the clear leader on this issue and ranked first account. Transparency should also benefit developing and with an overall score of 69%. The remaining 24 companies transition economies by improving the business environment, scored very much more poorly – 23 scored less than 30%, helping to attract foreign direct investment. including Shell, which scored 29% and BP, which scored 27%. Source: www.eitransparency.org 11 NEWS Just Pensions’ Construction and Building Materials Sector Note customer demand for sustainable products and certified management systems risk losing contracts to their more sustainably oriented competitors. The following is an excerpt from Just Pensions’ Construction and Building Materials Sector Note. The full note is available at Human capital management www.uksif.org. Workers in the UK construction industry have a higher than average prevalence rate of work-related ill health. A recent The note is the eighth produced by Just Pensions, with input focus on health and safety (H&S) by leading companies has from Insight and other fund managers. The notes identify the reduced fatal injuries. However, construction projects also have most business-relevant social, environmental and ethical risks the potential to cause harm to users and the wider public, facing the sector. The purpose of the notes is to enable pension e.g. in the rail sector. The use of subcontractors does not fund trustees to better understand risks that lie outside the necessarily reduce the liability to the main contractor. In fact, realm of traditional financial analysis, but that may influence the director liability for injuries and deaths at work can be a performance of their investments. It is hoped that trustees will significant risk to a board. A poor H&S record can reduce a then ask questions of their pension fund managers about how company’s ability to win contracts, particularly for PFI and they assess companies’ management of these important risks. major infrastructure projects. There is a shortage of skilled workers in this sector, from labourers to senior management. Sector structure The industry suffers from a poor image as a career choice; recruitment of talented graduates, especially women, is a House-builders, UK and some US 36% significant challenge. The shift towards university rather than apprentice-based training for school leavers, as well as the Construction equipment distribution, 24% risk of injury at work, may be contributing to the lack of skilled UK and Europe labour for site work. Greater use of imported labour may relieve Building materials (heavy), UK & US 21% short-term shortages, but can increase H&S risks (numerous languages and skills levels on one site can contribute to Building materials (light), global 12% accidents) and does not address long-term training and recruitment problems. Contractors, global 7% Access to future development opportunities The top 10 UK-listed construction and building materials companies, In developed countries, the amenity value placed on by market capitalisation, at the date of publication of the Note were: undeveloped land has risen to such an extent that gaining Wolseley, Hanson, BPB, Travis Perkins, RMC, Persimmon, Aggregate permission for new quarrying, industrial plant facilities, Industries, Taylor Woodrow, Wimpey and Barratt. commercial or residential development is very difficult. If planning permission is obtained, environmental permitting requirements, social housing targets and regeneration of Key issues facing the sector contaminated urban sites increases the cost of development More stringent UK environmental policy and regulation and may reduce profitability. Companies with good reputations Government policy is increasingly designed to internalise the and expertise in operating within a restrictive planning system cost of environmental impacts of business. The introduction of will have greater success in converting ideas into profitable the EU Emissions Trading Scheme in 2005 has set a price for development opportunities. The construction of infrastructure excess carbon emissions and is expected to increase electricity projects is often controversial due to their inevitable impact prices across the EU, driving up costs for heavy electricity users on the physical environment. Local anger at lack of consultation in this sector. New UK taxes are raising the cost of virgin and/or compensation can delay projects and generate negative aggregates and waste disposal in landfill. EU regulations to publicity for the lead contractor. Companies in controversial increase energy efficiency in buildings could raise costs for sectors who are able to manage stakeholder relationships house-builders but offer new markets to building materials effectively and thereby reduce conflict and delays will save manufacturers with appropriate products. Key customers such costs and endear themselves to clients. Investment in the local as the UK Highways Agency, government departments and economy can also improve the operating environment for a corporate clients are increasingly incorporating sustainable contractor looking to work long-term within a community. purchasing requirements into the tender process, especially Public Finance Initiative (PFI) contracts. These often require evidence of an environmental management system and the use of recycled or sustainably sourced materials, as well as energy efficient building designs. Companies failing to respond to 12 GUEST ARTICLE Corporate responsibility: from policy to performance listed oil and gas companies. We found that, among the leaders – BP, BG, Shell –corporate commitments on CR are comparatively well developed. However, even among the Andy Gouldson leaders, the management processes used to translate broad, Deputy Director, Centre for corporate commitments into site-specific standards are Environmental Policy and either poorly developed or are not made fully transparent Governance, London School within corporate reports. More particularly, the principles of Economics established to guide site-specific standard-setting processes The following is a guest article by Andy Gouldson, are not clear and standards are commonly set through Deputy Director of the Centre for Environmental Policy devolved decision-making processes where there is and Governance at the London School of Economics (LSE). considerable discretion and little transparency. Thereafter, Views expressed are the author’s and do not necessarily data on site-level performance levels is rarely available, and represent those of Insight. where it is available, it is not provided in a common, consistent format by different firms. These factors make it Introduction virtually impossible to compare and contrast performance, be it from company to company, from site to site, or over time. Now that many UK companies have adopted corporate responsibility (CR) policies, questions are inevitably being Phase 2: Benchmarking corporate environmental asked about the extent to which these policies lead to performance tangible changes in social and environmental performance. In some countries, the absence of corporate reporting on site- In other words, the procedural focus of many contemporary specific performance is compensated for by the publication of CR initiatives (where the emphasis is placed on management Polluting Releases and Transfer Registers (PRTRs), which systems, audit protocols, reporting frameworks and so on) is provide site-level emissions data in a standardised format for gradually being supplanted by a more substantive focus on industrial facilities and other significant sources of emissions. the social and environmental outcomes that companies As a result, they enable comparative measures of corporate deliver in different operating locations. However, little reliable, performance to be established. However, there are often consistent information is made available by companies on the problems with the quality and scope of the data and many performance that they achieve. It is therefore difficult for countries do not have PRTRs. The PRTRs that have been investors and other stakeholders to assess whether policy is established, most notably the US Toxic Releases Inventory (TRI) indeed translating into good practice. and the EU European Polluting Emissions Register (EPER), are Insight aims to promote research and the development and often not entirely compatible. There are inconsistencies in the use of tools that enable companies to achieve better CR data and some potentially valuable data is commonly not performance and, ultimately, better financial performance. In reported. For example, data may be available for some but late 2003, Insight and LSE established a collaborative research not all years, data on incidents or breaches of compliance are project to start to examine the more substantive or outcomes- generally not included and there are only limited links with oriented aspects of CR. The research had three main goals: related data (i.e. on air quality and health). 1. To examine the management processes used to translate Despite these limitations, the data that are made available broad corporate policies on CR into site-specific standards. through PRTRs clearly have value. Using data from the EPER and the TRI, we found significant variations in the emissions of some 2. To examine whether it is possible to measure and compare key pollutants from 250 refineries in the EU and the US. These site-level environmental performance. variations exist both across the range of refineries -– with dirtier 3. To investigate these issues in more detail through a case refineries emitting at least five times as much as cleaner study of CR outcomes at the local level. refineries – and between the EU and the US – with refineries in the EU emitting more than twice as much as refineries in the US. The research focused on the oil and gas sector, and particularly At the local level, the research revealed strong correlations on oil refineries, as these facilities are relatively similar and between higher levels of emissions from refineries and lower thereby offer the potential for meaningful comparison of their levels of income, employment and population density in the environmental performance. Two refineries in Durban, South districts in which the refineries are located. Although some Africa, were chosen as case studies, in part because they have NGOs might be tempted to say that this proves that companies been the focus of local campaigns relating to their perceived adopt lower standards in poorer areas, it is important to poor environmental performance. emphasise that these findings do not reveal anything about the causal factors that might lead to these correlations. Findings Phase 3: Local-level outcomes Phase 1: Translating corporate policies into site-specific practices The case studies revealed that emissions from the two refineries in Durban were towards the top of the range of EU The first stage of the research was to review CR policies of and US refineries. Moreover, the deleterious health effects on firms in the oil and gas sector, focusing specifically on UK- local people of these emissions are exacerbated because the 13 refineries operate in a basin that restricts their dispersal at To avoid confusion, and to demonstrate their commitment certain times of year. The research showed that that key to acting responsibly, companies should adopt explicit concerns amongst the local community relate not to environmental policies and effective governance processes emissions per se but to their impacts on local air quality and to ensure that these policies are implemented consistently public health. Although the refineries are not the only source across the business. They should also publish clear, of emissions, they do contribute substantially to the poor air consistent and comprehensive reports on performance, quality in the area. In the absence of effective government including on emissions and outcomes at the site level. On regulation, local communities believe that the companies these grounds, it seems that even the leading companies operating the refineries should take action to address these have still got some way to go. problems, not least because of the companies’ corporate From the public policy perspective, this research has commitments to CR. The local people feel that these do not demonstrated that PRTRs can play an important role in translate into high standards of performance at the site level. enabling stakeholders – at least those with the capacity to Fortunately, in the specific case of Durban, new regulations and access and process the data – to make more informed local environmental improvements are being implemented. judgements about corporate performance. Potentially, this However, this is not the case everywhere. This finding gives them greater ability to encourage improvements in highlights the need for companies to address not only their corporate environmental performance by providing them emissions in isolation, but also their broader impacts, for with a basis for dialogue with companies. Moreover, this example on air quality and health in the local area, and to do so information would allow them to benchmark companies more proactively and more consistently. operating locally and to put pressure on regulators to take action to reduce emissions. Conclusions and recommendations If PRTRs were adopted in more countries, they would Our research indicates that there is substantial scope for enable regulators and stakeholders to make more companies to develop more substantive, outcomes-based informed judgements about the performance of companies. approaches to their CR commitments. However, on the PRTRs that include a range of sources (e.g. transport, normative side of the debate on CR and environmental light industry) should also benefit companies by: (a) providing performance, more complex questions emerge: a single credible source of environmental information; and (b) putting industrial emissions into the context of I Should companies necessarily adopt the same standards total emissions within a region. Further, there is significant wherever they operate? scope for national PRTRs to be made more compatible, I If not, should they comply only with local laws? and all PRTRs could usefully be extended to include more I What should they do if these laws fail to provide adequate data on both the social and the environmental aspects of protection for local communities? CR. One possibility is for the government of the US and the EU to set up an extended PRTR framework to encourage I Should they then comply with certain minimum standards, those firms that have their either have their headquarters, such as United Nations or World Health Organisation or are listed on the stock markets within their borders, ambient quality standards? to report site-specific data in a common format for all of I What should a company do when it contributes to, but is not their sites around the world. the sole cause of, a breach of those minimum standards? Insight’s view LSE’s research raises a number of important issues for US; and (b) (if the data can be obtained) include investors. Perhaps the most important is that investors need assessment of whether correlations can be determined to look at on-the-ground performance to get a real sense of with aspects such as ISO14001 certification or with the quality of policy implementation. The research also ownership of refineries. I indicates that many stakeholders do not see corporate Reporting: CSR reporting, in particular through disclosures as credible, and this lack of credibility is a barrier contributing to the ongoing discussion with companies to effective stakeholder engagement. Finally, some of the key and other stakeholders about the types of disclosures information required by stakeholders is not readily available. that could be provided at the site level. Insight has met with BP, Shell and BG to discuss the results of I Public policy: Broad discussion about the question of the research. We also hope to meet with IPIECA – the whether there is room for the industry to sign up to a International Petroleum Industry Environmental Conservation voluntary ‘EPER plus’, where standard emissions and Association. other relevant data is reported by all refineries and where oversight is provided by government(s) or an independent We expect that our research and discussions will catalyse third party? action in three areas: Finally, while we have focused on the oil and gas sector, I Research: LSE’s research would benefit from being we recognise that the research is applicable to most other broadened to: (a) include refineries outside the EU and industry sectors. We will, therefore, also share the research with other industry sectors. 14 OPINION Can corporate responsibility cut red tape? The business community is strengthening its demands for the consent, corporate public disclosure. This body of regulation government to lighten the regulatory burden on business. gains its purpose and legitimacy from fundamental ethical The latest development is the publication – with the support principles about the need for companies to take due care, of the Treasury – of the Hampton Review, which responds to respect rights, be honest, keep their promises, treat their those demands by proposing initiatives centred on the customers and employees fairly, and be accountable for their application of risk-based regulatory enforcement. In actions. If companies meet the requirements of these particular, the Review suggests that businesses with the principles consistently and comprehensively – a challenge not poorest records of meeting regulatory requirements should to be underestimated – they will automatically meet minimum face the strictest compliance regime, and those with the best regulatory standards. In this respect, corporate responsibility records, the lightest. Insight supports this principle. should be recognised as delivering compliance with the law, rather than ‘going further’ and ‘doing better’. It seems reasonable to suggest that the more effective companies are at meeting their corporate responsibilities Clearly, there are some circumstances in which regulation does through self-regulation, the less need there should be for not extend to all of these areas. Even in well-regulated heavy-handed government-led enforcement. As we will countries, law will often lag behind evolving public expectations argue, we believe this should mean that those who advocate of companies. Many companies operate in or source from that the regulatory burden on companies be eased – countries that lack the capacity or the will to regulate business i.e. that red tape should be cut – should be natural allies effectively. In such situations, whether motivated by risk of well-conceived and executed corporate responsibility management or moral conviction, companies may – and programmes. But, in our experience, this not always the case. already often do – choose to voluntarily set and meet corporate responsibility standards beyond those enforced by local Why? One reason, we suspect, is that corporate responsibility regulators. However, in heavily regulated economies like the UK, is often understood and presented, not least by government, the primary challenge is to uphold basic CR principles that as being those actions that take business beyond regulatory would deliver regulatory compliance, and not to go beyond compliance. As the DTI put it in its draft international strategy them in this way. on corporate responsibility in March 2004, ‘National legislation/ regulation performs an important role in When companies do succeed in regulating their own establishing minimum levels of behaviour...It sets the base on behaviour, we believe that they deserve a lighter touch from which CSR builds to go further and do better’. The European regulators. If this approach were to be adopted, it is fairly Commission seems to define it similarly. However, from a easy to see that the more companies fulfil their corporate philosophical point of view, the idea that corporate responsibilities on a day-to-day basis, the more easily they will responsibility is primarily about going beyond regulatory comply with regulation and the lighter the burden of requirements is wrongheaded. Corporate responsibility is regulatory intervention they will deserve and should have to about meeting the legitimate ethical expectations of bear. We suggest that when regulators conduct their risk stakeholders. In modern, highly regulated economies, many assessment, they should look for evidence of robust policies of the most important public expectations about responsible and good governance systems relating to corporate business practice are already the subject of regulation. responsibility as a leading indicator of likely future compliance. Such an approach, we believe, could be a very To recognise this, one only has to think about the mass of effective way to reduce the regulatory burden on companies regulation relating to customer protection, product safety, in many areas and reward good business practice. workplace health and safety, discrimination and equality in employment, privacy, environmental pollution, planning Hampton Review: summary of recommendations The Hampton Review’s central objective is to raise both the quality and the effectiveness of the Uk’s regulatory system. The Review believes it should be possible to achieve greater excellence in regulatory outcomes – but to do so substantially more effectively, by: I Entrenching the principle of risk assessment throughout the regulatory system, so that the burden of enforcement falls most on highest-risk businesses, and least on those with the best records of compliance; I In particular, ensuring that inspection activity is better focused, reduced where possible but, if necessary, enhanced where there is good cause; at present, not only are necessary inspections carried out but necessary inspections are not carried out; I Making much more use of advice, again applying the principle of risk assessment; I Substantially reducing the need for form filling – in practice, most businesses’ most frequent and direct experience of regulatory enforcement – and other regulatory information requirements; and I Applying tougher and more consistent penalties where these are deserved. Source: www.hm–firstname.lastname@example.org/budget 15 THE INVESTOR RESPONSIBILITY TEAM The Investor ...on the lighter side Responsibility team From left to right: Sarah Gillett, Steve Waygood, William Claxton-Smith, Rachel Crossley, Rory Sullivan, Kerry ten Kate, Craig Mackenzie, Jennifer Kozak. Biographies of team members are available at www.insightinvestment.com/responsibility/ team/team.asp. WHO WE ARE Insight Investment: a responsible investor Insight Investment is the asset management business of We challenge companies where we consider their the Halifax and Bank of Scotland Group (HBOS plc), one of performance weak on environmental, social and ethical the biggest names in UK financial services. We manage issues and encourage them to operate according to global over £79.2 billion (as at 31 March 2005) for clients and business principles and high standards. We also vote on all have ambitions to grow. corporate governance matters according to our clients’ wishes. We have a clear investment philosophy and process with particular expertise in fixed income, equities and property. We believe it is important for companies, including Insight, We also have a strong commitment to Investor Responsibility to be transparent and report regularly and fully on their and Corporate Governance, which this bulletin illustrates. We corporate responsibility activities. We therefore publish manage investments on behalf of millions of retail customers this bulletin quarterly, so that our clients and the broader of the HBOS group and on behalf of in excess of 300 investment community can gain a better understanding institutional clients, including corporate and local authority of the work carried out on their behalf by our Investor pension funds, charities and unions. Our Investor Responsibility team. Additional information about our Responsibility policy commits us to actively encouraging Investor Responsibility service and reports related to companies to meet high standards of corporate governance our work are available at and corporate responsibility. Insight believes that it is in the http://www.insightinvestment.com/corporate/responsibility. long-term interests of both its clients and wider society that investors fulfil this role. 16 Company engagement report* ENGAGEMENT ACTIVITIES THIS QUARTER COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT Alliance and Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight expressed broad Leicester plc remuneration levels are Schemes remuneration scheme support for the new justified and that rewards with the company. remuneration plan to the are linked to corporate and Company Secretary. individual performance. AMEC plc Board Remuneration To ensure that Board Remuneration Discussed proposed Insight anticipates supporting remuneration levels are Schemes changes to remuneration the remuneration proposals at justified and that rewards scheme with the the next AGM. are linked to corporate and company's advisors. individual performance. Amvescap plc Board of Directors To ensure an appropriately Board Composition Discussed Board structure Insight supports the proposals constructed Board that is with the company. that are to be put forward at able to conduct effective the AGM, which include the stewardship of our changing of the articles of investment. association to separate the roles of Chairman and Chief Executive. AWG plc Health and Safety To promote high standards Governance of Hosted a conference on Company attended conference of health and safety. Health and Safety the role of executive jointly hosted with the Health director leadership on and Safety Executive, and the Occupational Health and Institute of Directors. Safety. Barclays plc Board of Directors To ensure an appropriately Chairman and Chief Met with newly appointed Meeting covered strategy, constructed Board that is Executive Chairman. finance and succession. able to conduct effective stewardship of our investment. Barclays plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Following consultation with remuneration levels are Schemes remuneration scheme Insight and other investors, justified and that rewards with the company. the company made are linked to corporate and amendments to the proposed individual performance. new remuneration scheme. Insight anticipates supporting the remuneration proposals at this year's AGM. Barclays plc Health and Safety To promote high standards Governance of Hosted a conference on Company attended of health and safety. Health and Safety the role of executive conference jointly hosted by director leadership on Insight, the Health and Safety Occupational Health and Executive and the Institute of Safety. Directors. BG Group plc Biodiversity To encourage companies to Best Practice in Key Sent final benchmark Insight made a number of minimise their impact on Sectors report and company's specific recommendations, biodiversity and support results and requested including that the company implementation of the meeting. communicate the results of its Convention on Biological biodiversity risk review; clarify Diversity. policy commitments; prepare an updated 5-year strategy; consider establishing partnerships with NGO experts; articulate criteria for case-by-case application on when to proceed with operations in sensitive sites; and communicate a summary of the components of its policy and management on biodiversity. Awaiting response to follow-up letter. BG Group plc Corporate To encourage improvement Performance Held discussion with Meeting with company to Responsibility (CR) in the overall framework for company. present Insight/LSE research Governance the control, management on the relationship between and reporting of corporate corporate policy and responsibility in companies. corporate performance. BG Group plc Corporate To encourage improvement Performance Held discussion with Meeting with company to Responsibility (CR) in the overall framework for company. present Insight/LSE research Governance the control, management on the relationship between and reporting of corporate corporate policy and responsibility in companies. corporate performance. * This report covers engagement with companies relating to significant governance and corporate responsibility issues conducted by Insight's Investor Responsibility team between 1 January and 31 March 2005. As such, it is not a complete report of Insight's overall engagement with companies, which also includes a large number of meetings between company executives and Insight's fund managers and analysts. These meetings are not currently the subject of a public report. 17 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT BP plc Board Remuneration To ensure that Board Remuneration Discussed proposed Following consultation with the remuneration levels are Schemes changes to remuneration Independent Adviser and justified and that rewards scheme with the Secretary to the Remuneration are linked to corporate and company. Committee, Insight supports individual performance. the final proposal which includes non-financial performance targets. BP plc Corporate To encourage improvement Performance Held discussion with Meeting with company to Responsibility (CR) in the overall framework for company. present Insight/LSE research Governance the control, management on the relationship between and reporting of corporate corporate policy and responsibility in companies. corporate performance. BP plc Revenue To support development of Encourage Support Requested meeting with The company was ranked 6th Transparency an international revenue of EITI Objectives company. out of the 25 global oil and gas transparency mechanism companies surveyed in the through EITI - the Extractive Save the Children report Industries Transparency 'Beyond the Rhetoric', Initiative. published in March. Insight requested a meeting with the company to discuss the report and its findings, as well as its next steps on revenue transparency. British Board Remuneration To ensure that Board Remuneration Discussed proposed Following discussions with the Airways plc remuneration levels are Schemes changes to remuneration Reward Manager, we justified and that rewards scheme with the expressed support for the are linked to corporate and company. operating margin and individual performance. appropriateness of targets. British Climate Change To encourage companies to Strategy Held discussion with Meeting with the company to Airways plc effectively manage climate company. discuss the current direction change risks. of policy in relation to climate change and the aviation industry. The company noted that it has publicly expressed support for the inclusion of the industry in emissions trading and is presently working on developing a more detailed assessment of the costs and benefits of emissions trading. British Climate Change To encourage companies to Strategy Held discussion with Insight was invited to make a Airways plc effectively manage climate company. presentation to the company's change risks. Corporate Responsibility Board on climate change and global sustainability. Insight suggested that the company conduct a scenario-planning exercise to look at the longer-term implications of climate change and to use this as a key input into its strategic planning processes. Insight also suggested that, based on the available data, active participation in emissions trading is likely to be the most economically efficient way for the industry to respond to climate change. British Corporate To establish and maintain General Discussed a range of Meeting with Chairman Airways plc Governance - investor confidence in the corporate governance covered succession, finance Miscellaneous Board. issues with the company. and strategy. British Board Remuneration To ensure that Board Remuneration Discussed proposed Insight supports the changes to American remuneration levels are Schemes changes to remuneration the scheme and anticipates Tobacco plc justified and that rewards scheme with the voting for the remuneration are linked to corporate and company. proposals at the AGM this year. individual performance. BT Group plc Board Remuneration To ensure that Board Remuneration Discussed proposed Meeting with Chairman and remuneration levels are Schemes changes to remuneration Senior Independent Director justified and that rewards scheme with the covered board remuneration are linked to corporate and company. and succession planning. individual performance. BT Group plc Corporate To establish and maintain General Discussed a range of Meeting with Chairman and Governance - investor confidence in the corporate governance Company Secretary covered Miscellaneous Board. issues with the company. succession planning, strategy and finance. 18 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT Cadbury Customer-Related To encourage companies to Consumer Health Met with company. The company has a long- Schweppes Risks identify, evaluate and and Obesity standing, extensive and plc effectively address comprehensive approach to customer-related risks. addressing consumer health issues, fully integrated with its business strategy. It is increasingly offering diet/low- sugar and natural beverages and has made changes to its confectionery products. It has a policy of not vending in primary schools or advertising directly to children under eight. Carnival plc Corporate To establish and maintain General Discussed a range of Meeting with Chairman/Chief Governance - investor confidence in the corporate governance Executive and Chief Operating Miscellaneous Board. issues with the company. Officer covered succession planning, board structure and remuneration. Cattles plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight has some concerns remuneration levels are Schemes remuneration scheme about the basic salaries and justified and that rewards with the company's unusual EPS (earnings per are linked to corporate and advisors. share) tests within the individual performance. proposed new remuneration policy. De Vere Board of Directors To ensure an appropriately Board Composition Discussed Board structure Insight supports the Group plc constructed Board that is with the company's company's board structure, able to conduct effective advisors. following explanation provided stewardship of our by the company's advisors on investment. board independence. du Pont (E.I) Health and Safety To promote high standards Governance of Hosted a conference on Company attended de Nemours of health and safety. Health and Safety the role of executive conference jointly hosted with and Company director leadership on the Health and Safety Occupational Health and Executive, and the Institute of Safety. Directors. Friends Board Remuneration To ensure that Board Remuneration Discussed proposed Following changes to the Provident plc remuneration levels are Schemes changes to remuneration proposed remuneration justified and that rewards scheme with the company scheme, Insight expects to are linked to corporate and via the ABI. support the resolution and the individual performance. forthcoming AGM. Gallaher Board Remuneration To ensure that Board Remuneration Discussed proposed Insight expressed broad Group Plc remuneration levels are Schemes changes to remuneration support for the remuneration justified and that rewards scheme with the proposals to Investor Relations, are linked to corporate and company. however, it was not clear from individual performance. the scheme whether the total shareholder return was measure on a single currency basis. Insight believes that this should be a requirement of remuneration schemes for global companies. We welcome the company's amendment to the scheme that the total shareholder return will be measured on a single currency basis. Grainger Trust Board of Directors To ensure an appropriately Board Composition Discussed Board structure Insight supports the plc constructed Board that is with the company's company's board structure, able to conduct effective advisors. following explanation provided stewardship of our by the company's advisors on investment. board independence. GUS plc Corporate To encourage improvement General CR Issues Held discussion with Insight told GUS it is broadly Responsibility (CR) in the overall framework for company about general comfortable with its CR Governance the control, management CR issues. management and reporting. and reporting of corporate We recommended that the responsibility in companies. company collaborate with other retailers sourcing extensively from China to develop shared solutions to labour standards problems. We alerted the company to emerging concerns regarding RFID and encouraged it to report on its stakeholder engagement activities. 19 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT HSBC Board Remuneration To ensure that Board Remuneration Discussed proposed Meeting with Chairman of the Holdings plc remuneration levels are Schemes changes to remuneration Remuneration Committee, justified and that rewards scheme with the company Company Secretary and are linked to corporate and via the ABI. Finance Director. Insight individual performance. supports the changes to the remuneration scheme and expects to be able to support the proposals put forward at the AGM this year. IMI Plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight expressed broad remuneration levels are Schemes remuneration scheme support to the Chairman of justified and that rewards with the company's the Remuneration Committee are linked to corporate and advisors. saying that we are broadly individual performance. happy, but understanding that the ABI had raised points of detail that he should address. Imperial Board of Directors To ensure an appropriately Chairman and Chief Meeting with Chairman. Meeting covered board Chemical constructed Board that is Executive structure, strategy, finance Industries plc able to conduct effective and remuneration. stewardship of our investment. Intertek Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight has expressed Group plc remuneration levels are Schemes remuneration scheme concerns over the structure of justified and that rewards with the company. the scheme, with LTIP are linked to corporate and participation being totally individual performance. driven by short-term performance, which we feel is questionable. The company is aware of the potential draw- backs of the scheme and remains totally committed to its use. In view of this, despite reservations, we will support the scheme. J Sainsbury Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight supports the proposed plc remuneration levels are Schemes remuneration scheme changes to the new justified and that rewards with the company. remuneration scheme and are linked to corporate and anticipates voting in favour of individual performance. the remuneration report at this year's AGM. J Sainsbury Board Remuneration To ensure that Board Remuneration Discussed proposed new Meeting with Chairman, plc remuneration levels are Schemes remuneration scheme Human Resources Director and justified and that rewards with the company. Investor Relations to discuss are linked to corporate and proposed long-term incentive individual performance. arrangements. Insight expects to be able to support the plan at the next AGM. J Sainsbury Customer-Related To encourage companies to Consumer Health Met with company. The company continues to plc Risks identify, evaluate and and Obesity address these issues effectively address proactively. Health is a key customer-related risks. pillar of its newly-articulated business strategy. The company has already begun several initiatives, including new product labels, product reformulation and a programme to promote exercise in primary schools and will be rolling out others during 2005. John Laing plc Board Remuneration To ensure that Board Remuneration Discussed proposed Following the restructuring of remuneration levels are Schemes changes to remuneration the company, Insight supports justified and that rewards scheme with the the amendments to the are linked to corporate and company's advisors. existing remuneration scheme. individual performance. John Menzies Board Remuneration To ensure that Board Remuneration Discussed proposed Following discussions with the plc remuneration levels are Schemes changes to remuneration Chairman of the Remuneration justified and that rewards scheme with the Committee and the company's are linked to corporate and company. advisors, Insight supports the individual performance. proposed performance share plan and the proposed bonus co-investment plan. Land Board Remuneration To ensure that Board Remuneration Discussed proposed Insight supports the changes Securities remuneration levels are Schemes changes to remuneration to the scheme and anticipates Group plc justified and that rewards scheme with the voting for the remuneration are linked to corporate and company's advisors. proposals at the next AGM. individual performance. 20 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT Lonmin plc Biodiversity To encourage companies to Best Practice in Key Sent final benchmark Having raised its concern minimise their impact on Sectors report and company's about the lack of policy and biodiversity and support results and requested strategy on biodiversity, implementation of the meeting. Insight welcomed the Convention on Biological company's new Biodiversity Diversity. Strategy and Action plan. As this is largely a statement of commitment and an information review, Insight encouraged the company to develop an updated strategy and action plan including operating principles, performance criteria and reporting indicators and implementation guidelines; sought clarification on the company's risk management and approach to realising its "no harm" policy; and discussed biodiversity offsets. The company felt that the concept of biodiversity offsets is a good one which it intends to explore in the future. Awaiting response to letter. Lonmin plc Corporate To encourage improvement General CR Issues Held discussion with Responding to the company's Responsibility (CR) in the overall framework for company about general request for information on its Governance the control, management CR issues. CSR documentation and and reporting of corporate website, Insight welcomed the responsibility in companies. greater range and depth of information included in the 2004 sustainable development report and 2005 roadshow presentation posted on the company's website, particularly the establishment of a committee on risk and safety, health, environment and community; the introduction of a charter; and systematic assessment of existing practice on sustainable development. Insight encouraged the company to report progress against targets in 2005. The company described its health and safety results and Insight asked for clarification on the units for lost time injuries frequency rates. Marconi plc Board of Directors To ensure an appropriately Chairman and Chief Met with newly appointed Meeting with the Chairman constructed Board that is Executive Chairman. and Senior Independent able to conduct effective Director to discuss board stewardship of our structure, strategy, finance investment. and remuneration. Marks & Board of Directors To ensure an appropriately Chairman and Chief Met with newly appointed Meeting covered strategy, Spencer constructed Board that is Executive Chairman. board structure, succession Group plc able to conduct effective and board remuneration. stewardship of our investment. Marks & Customer-Related To encourage companies to Consumer Health Met with company. While the company has Spencer Risks identify, evaluate and and Obesity offered a number of health- Group plc effectively address orientated ranges and customer-related risks. products for several years, it is currently developing a comprehensive strategy to address consumer health and obesity issues, which it views as extremely important. Information on the specific components of the strategy is not yet available. Millennium & Corporate To establish and maintain General Discussed a range of Meeting covered strategy, Copthorne Governance - investor confidence in the corporate governance finance, succession and Hotels Miscellaneous Board. issues with the company. remuneration. 21 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT National Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight supports the changes Express remuneration levels are Schemes remuneration scheme to the scheme and anticipates Group plc justified and that rewards with the company's voting for the remuneration are linked to corporate and advisors. proposals at the next AGM. individual performance. National Corporate To encourage improvement CR Disclosure and Held discussion with Insight was invited to Express Responsibility (CR) in the overall framework for Reporting company about CR comment on the company's Group plc Governance the control, management disclosure. draft 2004 CSR report. Insight and reporting of corporate made a number of responsibility in companies. suggestions relating to the provision of data on trends in performance and emissions, and ensuring consistency in reported data from year to year. Insight also suggested that the report include a discussion of the actions taken in response to the comments made by Transport 2000 in its review of the 2003 report. National Grid Biodiversity To encourage companies to Best Practice in Key Sent final benchmark The company's analysis Transco plc minimise their impact on Sectors report and company's suggests biodiversity is not biodiversity and support results and requested among its top five non- implementation of the meeting. financial risks. Insight Convention on Biological recommended that the Diversity. company communicate better the basis for its risk assessment and management related to biodiversity, and the company agreed to address this. The company also has experience with biodiversity offsets in Australia and offered to put Insight in touch with experts working on the topic. National Grid Board of Directors To ensure an appropriately Chairman and Chief Meeting with Chairman. Meeting covered board Transco plc constructed Board that is Executive structure, strategy, finance able to conduct effective and remuneration. stewardship of our investment. National Grid Climate Change To encourage companies to Scoping Held discussion with Initial discussion. Company Transco plc effectively manage climate company regarding its provided details of its new change risks. approach to climate climate change position change. statement and the measures it is taking to implement its commitments. Next plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight is supportive of the remuneration levels are Schemes remuneration scheme non-controversial proposed justified and that rewards with the company. new remuneration scheme are linked to corporate and that does not apply to individual performance. executive directors. Peninsular and Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight supports the proposed Oriental remuneration levels are Schemes remuneration scheme new incentive arrangements Steam justified and that rewards with the company. and anticipates voting in Navigation are linked to corporate and favour of the remuneration Company individual performance. report at the AGM this year. (The) Premier Oil Biodiversity To encourage companies to Best Practice in Key Sent final benchmark Insight made a number of plc minimise their impact on Sectors report and company's specific recommendations, biodiversity and support results and requested including that the company implementation of the meeting. communicate its risk Convention on Biological assessment process at Diversity. corporate level; explain the basis for prioritisation of its work on biodiversity and understanding of what is a "sensitive site"; prepare a clear policy and strategy on how environmental impacts, including those on biodiversity, are addressed; and set targets for environmental performance and report against these. Awaiting response to letter. 22 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT Rathbone Strategy To ensure that the Mergers, Discussed upcoming Meeting with Chairman and Brothers plc company's strategy is fully Acquisitions and merger, acquisition or Chief Executive covered the explained and is in the Disposals disposal with the rationale of their proposed interests of its shareholders. company. transaction with Investec. Redrow plc One Million To encourage companies to Benchmarking Continued engagement Insight visited the company's Sustainable Homes adopt more sustainable House-builders on sustainability issues. headquarters and two building policies and practices. sites to learn about its new Light Steel Frame (LSF) prefabricated technology and its new affordable housing range using LSF technology, called Debut. The homes will meet the EcoHomes ‘Excellent’ rating. The first developments will be built during 2005. Rio Tinto plc Board of Directors To ensure an appropriately Chairman and Chief Meeting with Chairman. Meeting covered board constructed Board that is Executive structure, strategy, finance able to conduct effective and remuneration. stewardship of our investment. Rolls-Royce Board of Directors To ensure an appropriately Chairman and Chief Met with newly appointed Meeting covered strategy, plc constructed Board that is Executive Chairman. finance, succession and able to conduct effective remuneration. stewardship of our investment. Senior plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight expressed support for remuneration levels are Schemes remuneration scheme the remuneration scheme and justified and that rewards with the company. has supported the new are linked to corporate and scheme at the AGM. individual performance. Serco Group Board Remuneration To ensure that Board Remuneration Discussed proposed Insight anticipates supporting plc remuneration levels are Schemes changes to remuneration the changes to the Executive justified and that rewards scheme with the Option Plan at the next AGM. are linked to corporate and company. individual performance. Shell Corporate To encourage improvement Performance Held discussion with Meeting with company to Transport & Responsibility (CR) in the overall framework for company. present Insight/LSE research Trading Governance the control, management on the relationship between Company plc and reporting of corporate corporate policy and responsibility in companies. corporate performance. Shell Revenue To support development of Encourage Support Requested meeting with The company was ranked 3rd Transport & Transparency an international revenue of EITI Objectives company. out of the 25 global oil and gas Trading transparency mechanism companies surveyed in the Company plc through EITI - the Extractive Save the Children report Industries Transparency 'Beyond the Rhetoric', Initiative. published in March. Insight requested a meeting with the company to discuss the report and its findings, as well as its next steps on revenue transparency. Shell Strategy To ensure that the Scenario Planning Participated in scenario- Insight was invited to Transport & company's strategy is fully planning exercise. participate in a 2-day expert Trading explained and is in the workshop, hosted by Shell, to Company plc interests of its shareholders. review Shell's Global Scenarios. The purpose of the meeting was to discuss the political and other forces that influence the global political environment and, consequently, impact on the business environment of a multinational petrochemical business such as Shell. The meeting also involved discussion of the key social issues about which Shell needs to be informed. Somerfield Customer-Related To encourage companies to Consumer Health Met with company. The company is currently plc Risks identify, evaluate and and Obesity developing a comprehensive effectively address strategy and set of policies to customer-related risks. address these issues, building on existing commitments and initiatives. Work has begun to evaluate the nutritional profile of all products and reformulate some as necessary. More information will be published in July 2005. 23 COMPANY ISSUE OBJECTIVE OF ACTIVITY ACTION THIS QUARTER STATUS ENGAGEMENT Spirent plc Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight expressed support to remuneration levels are Schemes remuneration scheme the Group Compensation & justified and that rewards with the company. Benefits Director and expects are linked to corporate and to support the new scheme at individual performance. the AGM. Taylor Nelson Board Remuneration To ensure that Board Remuneration Discussed proposed new Insight supports the proposed Sofres plc remuneration levels are Schemes remuneration scheme new incentive arrangements justified and that rewards with the company's and anticipates voting in are linked to corporate and advisors. favour of the remuneration individual performance. report at this year's AGM. Tesco plc Customer-Related To encourage companies to Consumer Health Met with company. The company does not plan to Risks identify, evaluate and and Obesity formulate a new strategy or effectively address policies to address emerging customer-related risks. health concerns. It will do so through existing programmes and using management tools. The company plans to introduce new product labels this year and is reviewing the nutritional profiles of certain categories and products. Unilever plc Corporate To encourage improvement General CR Issues Participated in Insight encouraged the Responsibility (CR) in the overall framework for stakeholder consultation company to substantially Governance the control, management on company's CR change the CR section in the and reporting of corporate approach. annual report so that investors responsibility in companies. get a clear picture of how its CR activities link to overall strategy and how they add value to the business. We also asked the company to report fully on managing labour standards issues. United Climate Change To encourage companies to Scoping Held discussion with Initial discussion. The Utilities plc effectively manage climate company regarding its company described the change risks. approach to climate studies it has conducted on change. the potential impacts of climate change and the business opportunities as a result of its experience in managing these issues. The company has prepared a new energy policy and associated strategy that is presently being discussed by the board. Insight suggested that the strategy include targets on energy performance and greenhouse gas emissions. Vodafone Board of Directors To ensure an appropriately Chairman and Chief Meeting with Chairman. Meeting with Chairman, Head Group plc constructed Board that is Executive of Remuneration Committee able to conduct effective and Group Compensation and stewardship of our Benefits Director covered investment. remuneration and board succession. 24 Noteworthy voting recommendations report* ABSTENTIONS, VOTES AGAINST MANAGEMENT, AND VOTES THAT WERE OTHERWISE CONTROVERSIAL COMPANY EVENT DATE RESOLUTION RESOLUTION TEXT OF RESOLUTION VOTE COMMENTS NUMBER TYPE RECOMMENDATION Capital Radio AGM 25-Jan-05 2 Ordinary To approve the report of Abstain We do not feel that the plc the Remuneration explanation in the Committee. remuneration report justified the payment of maximum bonuses in a year when trading performance was disappointing. Euromoney AGM 1-Feb-05 2 Ordinary To approve the report of Abstain We are concerned with a Institutional the Remuneration number of issues, in particular, Investor plc Committee. the continuation of the 24- month payment on severance. Lonmin plc AGM 27-Jan-05 2 Ordinary To approve the report of Abstain We are not fully satisfied with the Remuneration the explanation for the ex Committee. gratia payment to the retiring director. Secure Trust EGM 20-Jan-05 1 Ordinary To approve the waiver Against Insight's policy is to Banking Group under Rule 9 of the City recommend voting against Rule plc Code. 9 waivers. Ultraframe plc EGM 25-Jan-05 2 Ordinary To approve the waiver Against Insight's policy is to under Rule 9 of the City recommend voting against Rule Code. 9 waivers. *A complete report of Insight's voting recommendations is available at http://www.insightinvestment.com/responsibility/reporting. 25 This page has been intentionally left blank. 26 This page has been intentionally left blank. 27 This page has been intentionally left blank. 28 29 This document was printed using paper comprising at least 75% de-inked post consumer waste and a maximum of 25% mill broke. No chlorine was used when it was whitened. 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