Adherence to the FRC’s Stewardship Code · 2014. 5. 1. · Corporate Governance Code guidelines...

Investment Management Association

Adherence to the FRC’s Stewardship CodeAt 30 September 2013

Detailed practical examples

May 2014

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May 2014

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Contents

Detailed Practical Examples

Afren plc 3

AngloAmerican plc 6

Barclays plc 10

Bumi plc 15

Carnival plc 18

First Group plc 22

Glencore Xstrata plc 25

Lonmin plc 30

Redrow plc 33

RSA Insurance Group plc 36

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3

Detailed Practical Examples – Afren plc

Afren plc

Background

At the Annual General Meeting on 11 June 2013, nearly80 per cent of shareholders voted against Resolution 2,to approve the Remuneration Report. This followed aseries of significant votes against the Report in previousyears, with 52 per cent voting against in respect of 2011and 49 per cent in respect of 2010.

Six of the directors received over 25 per cent of votesagainst their re-election, reflecting some concerns overindependence and executives’ failure to declare analleged conflict of interest1:

Resolution 3, to re-elect the Chairman Mr EgbertImomoh – 30 per cent

Resolution 4, to re-elect Mr Peter Bingham as adirector – 44 per cent

Resolution 5, to re-elect Mr John St John as adirector – 28 per cent

Resolution 6, to re-elect Mr Toby Hayward as adirector – 28 per cent

Resolution 7, to re-elect Mr Ennio Sganzerla as adirector – 25 per cent

Resolution 8, to re-elect Mr Patrick Obath as adirector – 25 per cent

Chairman Imomoh said: “Since our [flotation] in 2005 wehave delivered total shareholder returns of 556%. Ourremuneration philosophy has reflected the need to retainexceptional talent in a highly competitive market, furthercompounded by the fact that we operate in verychallenging areas. However, we have been sent a clearmessage by our shareholders and are committed toensuring that the results are very different at next year’sAGM2”.

Objectives

Of the 14 respondents that had a holding in Afren, sixengaged. Remuneration was the main concern for fourrespondents, of which one also engaged on successionplanning and another on environmental and social issues(Chart I). One respondent’s objective was to:“Understand board succession planning; receive

assurances that no more ‘exceptional’ project-specificbonuses would be paid; understand potential conflicts ofinterest for directors as a result of the FHN [FirstHydrocarbon Nigeria] transaction”.

One respondent engaged on strategy and the one“other” respondent stated that it generally expressesconcerns over corporate governance issues via voting inthat it sends a letter to companies when it does notsupport management’s resolutions.

Two of the respondents that engaged changed theirholding because of their concerns. One divested itsholding for “fundamental reasons and concerns aboutshareholder returns” and the other significantly reducedits holding from 3 per cent to under 0.5 per cent of theoutstanding share capital.

Chart I: Engagement with Afren – No. of respondents

Eight respondents that had a holding in Afren did notengage, the reasons including:

too small a holding (four).

engagement criteria not fulfilled e.g. engagementwould not be in their clients’ best interests (three).

issue not significant to the respondent’s interest inthe company (one).

Strategy1

Other1

Remuneration andenvironmental/

social issues1

Remunerationand board1

Remuneration2

1 Theguardian.com 11 June 20132 Ibid.

http://www.theguardian.com/business/2013/jun/11/afren-pay-rejected-80-shareholders

http://www.theguardian.com/business/2013/jun/11/afren-pay-rejected-80-shareholders

4


Outcome

Four of the six respondents that engaged consideredtheir engagement to be partly successful/effective. To quote:

“Long standing [remuneration] committee chairstepped down.”

“[Afren] appear to recognise the need to improve butwe were disappointed by the continued lack ofconsultation.”

“Over the year we have seen some positivedevelopments around remuneration, leading us tosupport the remuneration report… at the 2013 AGMwhereas we had previously voted against.”

“As a result of the discussions, our views on riskregarding corporate governance and managementpriorities were heightened.”

The other two respondents considered the engagementto be of little success. One received no response fromthe company whereas the other stated that “someassurances were received regarding remunerationarrangements”.

Details of engagement

Contact with Afren

The six respondents that engaged with Afren had a totalof 12 separate contacts, an average of two each. TheChair of the Remuneration Committee was contactedthe most overall by half of the respondents.Management was contacted five times and its Chairmanand Executive Directors twice each (Table I).

Table I: Number of contacts and who with

No. of No. ofcontacts respondents

Chairman 2 2

Remuneration Committee Chair 6 3

Executive Directors 2 1

Management 5 2

Company Secretary 1 1

Investor Relations 1 1

Contact was mainly by dedicated specialists with a totalof nine contacts for four respondents (Table II). Tworespondents contacted Afren via portfoliomanagers/analysts.

Table II: Number of contacts and who by


Portfolio managers/analysts only 5 2

Dedicated specialists only 9 4

Portfolio managers/analysts and dedicated specialists 1 1

Contact with other investors

Only one respondent collaborated with other investors.This was initiated by an established local authoritypension fund group and the respondent considered thecollaboration effective.

2013 AGM

None of the respondents attended the AGM.

Resolution 3, to re-elect the Chairman, EgbertImomoh

Four respondents voted in support of Resolution 3 to re-elect the Chairman (Table III). Three explained therationale, to quote:

“The board was adequately independent by ourstandards. We also chose to express our concernsabout remuneration by voting against theremuneration report as voting against the directorswas considered unnecessarily aggressive at thispoint.”

“We believe that the company have recognised thatimprovements are required and believe that theChairman is working towards these improvements.”

Two respondents voted against, one stating: “[Manager]voted against all of the directors due to concerns overpotential conflict of interest regarding the recent FHNtransaction in Nigeria, where ‘certain directors’ werereported as shareholders via a nominee company and

5

Detailed Practical Examples – Afren plc

stood to benefit personally from the deal.” The otherrespondent explained: “[Owner] will vote against theelection of individual directors if the director is an NEDwho is not considered to be independent per the UKCorporate Governance Code guidelines and boardcomposition does not comply with the code.”

Resolution 4, to re-elect the Non-Executive Director,Peter Bingham

Four respondents voted against Resolution 4, to re-electthe Non-Executive Director Peter Bingham.Explanations for this decision included:

“The audit committee should be fully independentand this director’s membership could hamper thecommittee’s impartiality and effectiveness. Theremuneration committee should be independent andthis director’s membership could hamper thecommittee’s impartiality and effectiveness. For widelyheld companies, the board should include at least50% independent non-executive directors to ensureappropriate balance of independence andobjectivity.”

“We were concerned by the remuneration and thelack of consultation and therefore voted against the[remuneration] report and all members of theremuneration committee.”

Two respondents voted in favour of Resolution 4 withone explaining that it considered the Board to besufficiently independent.

Table III: Resolutions 3 and 4

Resolutions 3 4

No. of respondents

For 4 2

Against 2 4

Abstain 0 0

None of the respondents of those that engaged withAfren abstained from voting on these two resolutions.Moreover, out of the four respondents that voted againsteither Resolution 3 or Resolution 4, or both, threenotified Afren of their decision.

Conflicts

None of the respondents with a holding had anyconflicts of interest.

Service Providers

Only one Service Provider engaged with Afren. It hadone contact with the company, and did not collaboratewith other investors nor attend the AGM.

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Background

At the Annual General Meeting on 19 April 2013,AngloAmerican faced protests over controversial miningprojects in Colombia and South Africa, and the climateimpact of its coal extraction3. Resolution 17, to giveauthority to allot shares received 30 per cent of votesagainst. Special Resolution 18, to give the company theright to disapply pre-emption rights, did not receive thenecessary 75 per cent of votes in support. Thecompany stated: “although this is a routine resolution forpublic companies in the UK, the directors had nopresent intention of exercising the proposed authority, asset out in the Notice of Annual General Meeting. TheCompany does not therefore anticipate anyconsequences arising from the resolution not beingpassed. The Company will discuss any concerns withthose shareholders, predominantly outside the UK, whovoted against this resolution4”.

Resolution 16, to approve the Remuneration Report,received 21 per cent of votes against – an increase fromthe 13 per cent of votes against in the prior year5.

In July the Group reported that first-half profits haddropped by 68 per cent as commodity prices fell andthe global economy remained weak. The recentlyappointed Chief Executive, Mr Cutifani, stated that thiswas unacceptable and promised to cut spending andhalve the number of pipeline projects6.

Objectives

Thirteen of the 23 respondents with a holding engagedwith AngloAmerican. Seven respondents wereconcerned with issues relating to the company’sleadership and strategy (Chart II). To quote:

“Our initial engagement concentrated on the need forthe company to appoint a new CEO and once thiswas accepted we encouraged the appointment of anexternal candidate. We have subsequently beenpressing the company to find a solution for theproblems facing its Platinum business as well as to

overcome the difficulties facing its Brazilian iron oreproject.”

“We had concerns regarding the problems in theSouth African mining industry and delays to MinasRio. The search for a replacement CEO was also keyfor us. We were seeking assurance that the Boardand Chairman were implementing the correctapproach to all pressing matters affecting thecompany and wanted to further understand theaction(s) being taken.”

“We discussed potential candidates for the CEOrole.”

“Our investment professionals conducted severalmeetings with AngloAmerican plc over the course ofthe year to better understand management’s strategyand restructuring efforts.”

Two respondents engaged on remuneration and afurther two on environmental and social issues, as wellas health and safety. The latter two explained that:

“Engagement centred on H&S and environmentalmanagement & performance.”

“We sought to understand the new management’sapproach to ESG issues, specifically in light of thelabour unrest in South Africa and delays to projectsin South America.”

Of the two “other” respondents, one did not describewhat it aimed to achieve from its engagement and thesecond stated that it wrote to the Company Secretary toexplain the rationale for not voting in favour of a numberof resolutions at the AGM.

Just one respondent changed its holding because of itsconcerns by changing the proportion of its portfolioinvested in AngloAmerican depending on the assessedrisk/reward profile.

AngloAmerican plc

3 Wdm.org.uk 18 April 20134 Angloamerican.com5 Online.wsj.com 22 April 20136 BBC.co.uk 26 July 2013

http://www.bbc.co.uk/news/business-23466885

http://online.wsj.com/article/BT-CO-20130422-711358.html

http://www.angloamerican.com/investors/meetings/agm2013/agm2013_voting

http://www.wdm.org.uk/climate-change/anglo-american-face-protests-agm-over-mines-colombia-and-south-africa

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Detailed Practical Examples – AngloAmerican plc

Chart II: Engagement with AngloAmerican – No. of

respondents

Of the ten respondents that had a holding but did notengage, nine provided an explanation. For threeAngloAmerican did not fulfil specific engagementcriteria, e.g. one respondent only engages withcompanies listed in its own market which is outside theUK. Two respondents did not have a material holding. Afurther respondent did not consider the issue materialand one other did engage but did so outside the periodcovered by this report. The other two stated:

“We purchased shares at the beginning of 2013 andsold in September 2013 following an assessment offuture performance and the potential diluting of therestructuring benefits in South Africa. We voted forall resolutions at the AGM and at the time we held0.1% of share capital.”

“In the Fund Manager’s view the company has agood level of governance and is improvingremuneration practices.”

Outcome

Two respondents considered their engagementsuccessful. One aimed at replacing the previous ChiefExecutive, Cynthia Carroll, which was achieved and theother explained: “Following our meetings with ChiefExecutive, Mark Cutifani, we were better able tounderstand the strategic direction and rationale thatwould be undertaken by the company over the next twoyears.”

Seven respondents considered their engagement partlysuccessful. To quote:

“Our meeting with executives helped us understandsenior management’s views. However, ourdiscussions coordinated through investor relationswere not as helpful.”

“Our efforts to encourage the company to appoint anew CEO were fully successful but it’s too early todetermine the success or otherwise of thecompany’s efforts to improve its operationalperformance.”

“Clarification was sought regarding details of theshare award made to the incoming CEO. Awardswere made to buy him out of existing arrangementsat another company. Since the awards did not haveany performance conditions attached to them, wewere not able to support the remuneration report.However, we took some comfort from certainmitigating factors such as the shareholdingrequirement of the role and the award being basedon expected value rather than a 1 for 1 replacement.We therefore abstained on the resolution.”

Engagement was not successful for two respondents,one of which explained that “the company still needs toprove that it is scaling back expensive [capitalexpenditure]”.

Health and safetyand environmental

/social issues2

Other2

Remuneration2

Strategy3

Leadership4

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Contact with AngloAmerican

Eleven respondents had a total of 36 separate contactswith AngloAmerican, an average of just over threecontacts per respondent. In most cases, contact waswith the Chairman and the Executive Directors – 13 and12 contacts, respectively, by six respondents each. Forten and five respondents contact was with InvestorRelations and Management, respectively. The Chair ofthe Remuneration Committee, Non-Executive Directorsand the Company Secretary were contacted by onerespondent each (Table IV).

Table IV: Number of contacts and who with


Chairman 13 6


Other Non-Executive Directors 1 1


Management 5 4



Contact was mainly by portfolio managers and analystswith a total of 26 contacts (Table V). For sevenrespondents the dedicated specialists contacted thecompany once each. For only two respondents contactwas by both portfolio managers/analysts and dedicatedspecialists.

Table V: Number of contacts and who by






Three respondents collaborated with other investors:

one attended joint meetings with the company onAngloAmerican’s initiative.

one entered into a collective agreement to vote thesame way.

one sent a joint letter with another investor.

In the last two cases, the respondents initiated thecollaboration by approaching an established investorgroup. All three respondents considered thecollaboration effective.

2013 AGM

Twelve of the 13 respondents that engaged withAngloAmerican did not attend its AGM in April 20137.

Resolution 17, to give authority to allot shares

All twelve respondents voted for Resolution 17 to givethe company the authority to allot shares (Table VI). Toquote:

“[Manager] recognises a company’s need for theflexibility to raise money to pursue opportunitieswithout seeking shareholder approval. [Manager]voted FOR resolution 17 because we believe theamount and duration proposed to be reasonable.”

“The proposed amount of the equity issuance wasnot considered excessive.”

“We had no concerns with the amounts or durationof the authority.”

Resolution 18, to disapply pre-emption rights

All twelve respondents voted in favour of Resolution 18to disapply pre-emption rights. To quote:

“Whilst we supported resolution 18, we raised ourconcerns regarding the alignment of pay withperformance and the recruitment incentive awardedto the incoming CEO.”

7 One did not state if it attended.

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Detailed Practical Examples – AngloAmerican plc

“A statement assuring investors that no more than7.5% of the issued share capital will be allotted on anon pre-emptive basis over any three year periodwas provided.”

“The resolution was in line with our votingguidelines.”

Table VI: Resolutions 17 and 18

Resolutions 17 18

No. of respondents

For 12 12

Against 0 0

Abstain 0 0

Conflicts

None of the respondents with a holding had anyconflicts of interest in relation to AngloAmerican.

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Background

At the 2012 Annual General Meeting, Resolution 2 toapprove the Remuneration Report received nearly 27per cent votes against. On 27 June 2012 Barclaysadmitted to misconduct related to submissions for theLondon Interbank Offered Rate (LIBOR) resulting in a£59.5million penalty imposed by the FSA and furtherpenalties by the US Department of Justice.

This was followed by the resignation of a number ofboard members and on 12 August 2012, Sir DavidWalker was appointed as Chairman undertaking torecruit a new Chief Executive and to reform paystructures.

On 30 August 2012, Antony Jenkins was appointedChief Executive and instigated a six-month strategicreview. Moreover, he pledged to rebuild the bank’sreputation by changing the culture under which itstraders operate, including changes to paymentprotection insurance selling and staff bonuses.

At the Annual General Meeting on 25 April 2013,Resolution 2 to approve the Remuneration Report, wasmore widely accepted than in 2012, with just over 5 percent of votes against. Resolution 18, to authorise theDirectors to allot securities received over 8 per cent ofvotes against.

Objectives

Thirty-one of the 40 respondents with a holdingengaged with Barclays. Similar to 2012, remunerationremained the main concern (Chart III). However, this yearrespondents also focused on the broader issues ofstrategy, governance and particularly cultural change. Toquote:

“Comfort that the company has learnt lessons and isimproving culture and values and is also looking toreduce pay/address pay issues (and making thismore aligned with good culture, long termperformance and returns to shareholders).”

“Continuing progress in changing the bank’s culture,rebuilding trust and reputation, and remunerationpractices more aligned with shareholders’ interests toenable a more appropriate distribution betweenshareholders and staff.”

“We wanted to express our views in relation toremuneration, board leadership and successionplanning, cultural change and also the implications ofthe LIBOR settlement. We wished to get confidencethat the board consider our views during their furtherreflection on these issues. We continued to engagewith the company on these matters throughout2013.”

“Subsequent to the departure of the CEO andchairman in 2012, we met the new incumbentsseveral times over the year. We wanted to test thenew top team’s ability to effect cultural and businesschange at the bank as well as its response to theSalz review, which had clearly been of someembarrassment to Barclays. We also had a numberof conversations on remuneration to understand boththe structural and cost changes the bank is lookingto make, and to ensure that appropriate adjustmentswere made for the CPI and LIBOR issues. We alsowrote to the bank to encourage adoption of therecommendations issued by the EnhancedDisclosure Task Force.”

The twelve “other” ranged from wanting to understandthe process of decision making at Barclays to havingdiscussions on the impact of regulatory change onstrategy and capital requirements, as well as thecompany’s reaction to the Salz review.

Four respondents changed their holdings because oftheir concerns. Two respondents increased it, onedecreased it but added that “it’s difficult to identify aparticular cause”, and the fourth did not specify butexplained that it would “continue to be concerned aboutthe potential negative impact of tighter regulatoryenvironment, including the new capital requirements,which could lead to lower margins and return on equity(ROE) for Barclays”.

Barclays plc

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Detailed Practical Examples – Barclays plc

Chart III: Engagement with Barclays – No. of respondents

The nine respondents that had a holding but did notengage with Barclays explained that either the holdingwas small or that certain engagement criteria were notfulfilled. One respondent stated that it did not engage“because corporate governance at Barclays hasimproved since the [new Chairman and CEO]appointments”.

Outcome

Seven of the 31 respondents that engaged achievedtheir objectives. This was mainly due to the changes inBarclays’ management and governance. To quote:

“New CEO and Chairman [were] appointed who arecommitted to improving the culture of the company.”

“We heard about positive proposed changes togovernance improvements, board changes andrenewed commitment to business ethics.”

“We were able to satisfy ourselves of the integrity ofthe Board and to reflect our confidence to thecompany”.

In addition, one respondent commended that under thenew leadership, Barclays “is making much more effort tointeract with shareholders on a wide variety of topics”.

Twenty respondents, i.e. the majority, considered theirengagement partly successful. It was generallyrecognised that Barclays is improving its practices but

further reform on remuneration and culture is neededand so engagement is on-going. For example,respondents stated:

“We are supportive of the direction that Barclays aregoing. We can see they mean business in view ofthe very public positions Sir David and AntonyJenkins are taking regarding changing the culture ofBarclays and its pay arrangements, and this wasreflected in our support (and improved votingposition) for the 2013 AGM. We will continue to holdthe company accountable for further improvementsbut for now they have made a promising start.”

“This is still an ongoing engagement. While therehave been changes around the leadership of thecompany, the review of culture is still ongoing. Wealso consider that the company’s remunerationpolicy and practices of do not sufficiently takeaccount of the shareholders’ interest in having aconservative approach to remuneration.”

“Our engagement with Barclays is ongoing. While weare seeing encouraging evidence of the cultural andbusiness change that the new top team have beenpromoting it is too early to determine whether theplan has been fully effective. On remuneration we areencouraged by the cost changes that the bank isimplementing, however we believe that Barclayscould go further in reforming its pay structures tobetter align them with the interests and experiencesof its long-term shareholders.”

“Some aspects of the engagement were achieved.For example, we gained assurance regarding thenew risk oversight provisions Barclays hasintroduced and the commitment of the board toembedding new cultural values throughout theorganisation. Many of the issues discussed, such asrisk management and cultural changes are very long-term issues and it will take longer than a few monthsto see the impact and success or not of suchinitiatives. The uncertainty regarding the regulatoryframework for banking remuneration has restrictedengagement on this issue during 2013. Weanticipate that remuneration will once again becomea key topic for engagement post September 2013.”

Only two respondents found their engagement to be oflittle success, with one stating that it did not receive aresponse from the company.

Other12

Remunerationand governance

4

Remunerationand strategy6

Culture and/orremuneration9

12



Contact with Barclays

Barclays was contacted more than any other of thecompanies in this section. Twenty-seven respondentscontacted it 184 times, an average of 6.8 contacts perrespondent. Most contact was with the ExecutiveDirectors and Investor Relations – 65 and 74 contactsby 20 and 14 respondents, respectively. There were 46contacts with the Company Secretary by fifteenrespondents, 34 with the Chairman by 18 respondentsand 32 with the Chair of the Remuneration Committeeby 15 respondents. One respondent alone contactedthe company 46 times (Table VII).

Table VII: Number of contacts and who with


Chairman 34 18

Senior Independent Director 7 5


Audit Committee Chair 1 1



Management 23 9



Most contact was by portfolio managers/analysts (TableVIII). Three respondents’ portfolio managers andanalysts accounted for 105 contacts.

Table VIII: Number of contacts and who by






Eighteen of the 31 respondents that engaged did so incollaboration with other investors. In most cases thisinvolved attending joint meetings with the company(Table IX). Two respondents participated in collectiveengagement on how to vote and six engaged throughassociations such as the LAPFF, NAPF and ABI.

Two collaborations were initiated by the respondentsand the other 16 either by an established investor groupor (in two cases) by the company.

All respondents considered their collaboration with otherinvestors to be effective.

Table IX: Collaboration

No. of respondents

Joint meetings with the company 13

Collective engagement on how to vote 2

Other 6

2013 AGM

None of the respondents that engaged with Barclaysattended its AGM in April 2013.

Resolution 2, to approve the Remuneration Report

Two thirds of respondents voted in support of Resolution2, to approve the Remuneration Report (Table X). Thiswas mainly due to the reforms introduced to the paystructure such as establishing a two-year vesting periodfor the 2013 Long Term Incentive Plan and makingclawback arrangements. For example:

“We agreed to support the remunerationarrangements at Barclays this year on theunderstanding that the company continues to buildon the improvements that are underway. … We willreview progress again at next year’s AGM.”

“We supported all resolutions at the shareholdermeeting in recognition of the new leadership andBarclays’ apparent willingness to make wide-rangingchanges.”

“… Barclays has disclosed several changes to itsremuneration policy, which we view as generally

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Detailed Practical Examples – Barclays plc

positive overall. … In addition, the 2012compensation/net income ratio has decreasedcompared to the prior year, and the company hasstated that it intends to reduce it further over thenext few years.”

“Remuneration was being reformed; Directors wereengaging more effectively; trust was being repaired.”

The one respondent that abstained from voting stated:“… the discrepancy between the insiders’ rewardscompared to shareholders and that contrast over time… underscores a fundamental misalignment that we arelooking to see resolved. Given the new team are aware,focused on and committed to addressing that, withsome initial indications of a move in the right direction …we are not opposing, but the current imbalance meanswe remain unable to support at present.”

Nine respondents voted against Resolution 2, citinglong-term issues with the remuneration structure and itsmisalignment to shareholder returns. To quote:

“Our vote has taken into consideration clearimprovements in the company’s remunerationpractices… We also acknowledge the forfeiting ofbonuses by the chief executive and finance director.However our vote reflects ongoing concern that theeconomics between executive and shareholderreturns is still not in proper balance. … While weacknowledge the positive direction of travel, wecannot support the implementation of theremuneration plan in 2012 because we believe thataggregate rewards to staff were excessive relative toperformance.”

“… Annual bonus criteria were qualitative which left agreat deal of discretion to a board that historicallyhas not acted in the interest of shareholders.Though the board composition has changed tosome extent, we have no assurance that futureactions will be in the interests of shareholders. Wealso did not see any change from prior years to thelong-term incentive plan. The plan is still linkedprimarily to return on risk-weighted assets which wedo not feel is appropriate. Return on equity or totalshareholder return components would be preferred.”

One respondent also commented that Barclays had hadthe same auditor for more than a hundred years8.

Resolution 18, to authorise the Directors to allotsecurities

Although at the AGM Resolution 18 to authorise theDirectors to allot securities received a higher percentageof votes against than Resolution 2, all respondents butone voted in support of it. Respondents consideredthat the amount and the duration of the securities werewithin acceptable limits and the issue itself was in theirclients’ interests. To quote:

“We strongly objected to the issue of shares on anon-pre-emptive basis in 2009. Since then, theboard has acted sensibly and under the newchairman, is aware of the need for an efficient use ofcapital and share issues.”

“In light of the company’s need to maintain orincrease levels of tier 1 capital, we believe the abilityto pre-emptively issue ECN’s offers the company acost effective way to maintain capital. Additionally,we believe the trigger rate of 7% is low enough toreduce the likelihood of any dilutive issuance fromoccurring.”

The one respondent that voted against the resolutionconsidered the “potential issuance of new shares wastoo high”.

Table X: Resolutions 2 and 18

Resolutions 2 18

No. of respondents

For 20 29

Against 9 1

Abstain 1 0

Seven respondents that voted against or abstainedinformed the company in advance as to why and fourdid not.

8 It was announced in March 2014 that Barclays would replace its auditor and PwC would not be invited to take part in the tender (Accountancy Age 7 March 2014).

http://www.accountancyage.com/aa/news/2332870/barclays-to-end-120-year-audit-relationship-with-pwc

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Conflicts

Five out of 40 respondents with a holding in Barclaysreported a conflict of interest due to the company beinga client. Two respondents outsourced their votingdecisions to a third party proxy research company anddid not engage with Barclays. The other three explainedhow the conflict was addressed:

one applied its conflicts of interest procedures and itdetermined that no conflict occurred from its votedecision.

one continued its engagement and voting in line withits policy which involves reporting any deviations fromthe policy with an explanation to senior management.

one had a conflict due to its parent company andafter consulting it updated its stewardship statementto address such a situation. This includes the parentcompany giving instructions on how to vote theshares held in funds where it is the ultimatebeneficiary and not influencing voting when funds areheld on behalf of third parties. Also in all othersituations the parent company maintains an arm’slength relationship with the respondent.

15

Detailed Practical Examples – Bumi plc

Background

In April 2013, trading of Bumi shares was suspendedwhilst it was investigated for accounting irregularities,after having already delayed the reporting of its financialresults due to allegations of irregular payments at BerauCoal (of which Bumi held an 85 per cent stake). Bumiannounced that it had hired Ernst & Young in addition totheir auditors, PwC, to expedite the process.

There had been a very public battle for control of Bumibetween Nat Rothschild and his co founders, the Bakriefamily. Scott Merrillees resigned from his post as CFOfollowing pressure from Nat Rothschild, who also calledfor Chairman Samin Tan and director Alex Ramlie to stepdown from the board9,10.

At the Annual General Meeting on 26 June 2013, sevenout of the eight resolutions to re-elect directors receivedover 25 per cent votes against, with Resolution 3 to re-elect Samin Tan receiving the largest votes against (29per cent).

Resolution 2, to approve the Remuneration Report,received nearly 32 per cent votes against, whileResolution 1, to adopt the accounts received nearly 35per cent of votes against. Both Resolutions 13, theauthority to allot shares and 16, the power to disapplypre-emption rights received over 75 per cent of votesagainst.

In July it was reported that the Chairman had reached adeal with the Bakrie family, which would result in himowning over 47 per cent of the company11.

Objectives

Six out of ten respondents with a holding engaged withBumi. The main concern for five was the escalatingconflict between Nat Rothschild and the Bakrie family(Chart IV). For example, respondents wanted to:

“… gain insights into the separation transaction fromthe Bakrie Group, the strategic steps being taken inlight of the company’s public battle with Nat

Rothschild and the accounting irregularities, and therestructuring of the board.”

“… understand how the Board is responding to theactions by their major shareholders and implicationsof the divestment of the Bakries holding.”

“… discuss how to settle the spat between the twomajor shareholders, which came to a head at anEGM called by Nat Rothschild.”

One respondent focused its engagement on governancestating: “we wanted assurances that the correctgovernance procedures were being followed accordingto regulators … removal from Board of anyone found tobe involved in past financial misdemeanour … anindependent Chairman and … to protect the interests ofminority shareholder interests in any of the separationdeals.”

None of the respondents that engaged changed theirholding in Bumi.

Chart IV: Engagement with Bumi – No. of respondents

The four respondents that had a holding but did notengage explained that this was due either to a too smallholding (three) or to Bumi generally not meeting theirengagement criteria (one).

Governance1

Rothschild –Bakrie battle5

Bumi plc

9 Theguardian.com 22 April 201310 Mining.com 17 April 201311 Reuters.com 18 July 2013

http://www.reuters.com/article/2013/07/18/bumi-idUSL6N0FO0R120130718

http://www.mining.com/bumi-founder-rothschild-pleased-to-see-cfo-leave-80930/?gce_var=lower-comments&utm_expid=17625373-0.wR1isPasQ6GSvnWKGYTdqA.1&utm_referrer=http%3A%2F%2Fwww.google.co.uk%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3D%26esrc%3Ds%26frm%3D1%26sourc

http://www.theguardian.com/business/2013/apr/22/bumi-shares-suspended-whistleblowers-claims

16


Outcome

Four respondents considered their engagement partlysuccessful and explained:

“We were satisfied that we had reached the rightdecision for clients but resolution of issues will taketime.”

“We supported the removal of board members andChairman at the EGM in 2013 which was defeatedhowever the Chairman did announce his plans tostep down as Chairman once an independentcandidate could be found.”

“While Mr Rothschild did not win in his battle at theEGM, at which we supported management on allresolutions in the interests of a more temperedresolution, and discussions now appear to be nearlycomplete regarding a split from the Bakrie family, itfeels difficult to say that this has been driven in themain by engagement from minority shareholders.This is particularly pertinent as the split from theBakrie family involves the Bakries selling their stake totheir partner and the company’s outgoing chairmanSamin Tan, leaving him with a nearly 50% stake in thecompany. However we hope that this split will draw aline under the issues and allow Bumi to continue as amore stable organisation.”

“Changes [were] made to shareholding structure.”

Two respondents considered their engagement to be oflittle success and explained:

“… there have been some improvements to payarrangements … [however] we have concerns overthe findings that Rosan Roeslani received significantlymore money than was known about in respect of hisexecutive duties at PT Berau. He receivedsubstantially more than had been disclosed to theBoard, and it is understood, to the PT BerauRemuneration Committee.”

“While we had concerns with the continued serviceof Samin Tan of the board, the separation transactionwith the Bakrie’s was paramount and the removal ofTan during this period was not advisable.”


Contact with Bumi

There were a total of 26 separate contacts by the sixrespondents that engaged, making an average of 4.3contacts per respondent. The Senior IndependentDirector and Executive Directors were contacted themost, with eight contacts each by 4 and 3 respondentsrespectively. The Chairman and other non-executiveDirectors were contacted once by three respondentseach. One respondent contacted Investor Relations fourtimes (Table XI).

Table XI: Number of contacts and who with


Chairman 3 3




Management 1 1


Contact was mainly by dedicated specialists (Table XII).For one respondent its portfolio managers and analystscontacted Bumi six times.

Table XII: Number of contacts and who by






Only one respondent collaborated with other investors.This involved an agreement to vote in the same way andwas initiated by another investor. The respondent did notconsider this collaboration effective given that the votedid not bring about the change it wanted although latera more moderate solution was announced (change ofChairman).

17

Detailed Practical Examples – Bumi plc

2013 AGM

Two respondents attended the AGM in June 2013.

One voted against all three resolutions and explained:“[we] voted against resolutions 1-4 and 6-22 …because we feel the incumbent Board offers the bestchance to deliver a recovery in shareholder value.Vote[d] for resolution 5, the removal of Nalinkant Rathodas Director, because we feel he should not be amember of the Board going forward given that he is arepresentative of the Bakrie Group and is the formerCEO of Bumi and Bumi Resources.”

The other respondent abstained from voting for allresolutions “as a signal to the Board that whilst[Manager] supports the efforts to clean up the companyand improve governance procedures, [Manager] doesnot believe they are doing all they can.”

Resolution 1, to receive and adopt the accounts andreports of the Directors and auditors

None of the respondents that engaged voted in favourof Resolution 1, to receive and adopt the companyaccounts and reports (Table XIII). In addition to the twoexplanations above, this was due to the external auditorreport stating that there was insufficient information onrelated party transactions and including an emphasis ofmatter paragraph relating to a Bumi subsidiary. Onerespondent in particular considered the audit report tobe “the latest evidence of a deeply troubled businesswhich has failed on a number of levels”. Only tworespondents gave the company advance notice of theirintention to vote against.

Resolution 13, to give authority to allot shares

Four respondents supported Resolution 13 to giveauthority to allot shares as they considered that theproposed amount and duration was withinrecommended limits.

Resolution 16, to give authority to disapply pre-emption rights

Similar to the previous resolution, four respondentsvoted in favour of Resolution 16 to give the companythe authority to disapply pre-emption rights as theproposal met with best practice.

Table XIII: Resolutions 1, 13 and 16

Resolutions 1 13 16

No. of respondents

For 0 4 4

Against 5 1 1

Abstain 1 1 1

Overall, only two respondents informed the company oftheir intention to vote against or abstain.

Conflicts

None of the respondents had a conflict of interest inrelation to Bumi.

Service Providers

Only one Service Provider engaged with Bumi. It did notcollaborate with other investors and did not attend theAGM.

18


Background

Over the last year Carnival was the subject of muchcontroversy following major shipping incidents such asthe fire in the engine room of the Carnival Triumph inFebruary 2013 and the engine failure of the CarnivalDream in March 2013. The company was still recoveringfrom the aftermath of the Costa Concordia disaster inJanuary 2012 where 32 people died. These events ledto extensive criticism not only from the media but alsofrom regulators and negatively affected the company’sshare price12,13.

At the Annual General Meeting on 17 April 2013shareholders expressed interest in receiving moreinformation about the Concordia incident at next year’smeeting14. All resolutions were passed with a highmajority of votes in support. Regarding the directors’ re-election, Resolution 3, the re-election of Arnold Donald,received the lowest support with 91 per cent of votes infavour, followed by 93 per cent of votes in support ofResolution 1, to re-elect Micky Arison.

On 3 July 2013 Carnival announced that Micky Arisonwould step down after 34 years as Chief Executive, arole which he held alongside his role as Chairman since2003. He was replaced by Arnold Donald.

Objectives

Twelve of the 22 respondents with a holding engagedwith Carnival. This was mainly on health and safetyissues, in some cases in conjunction with governanceissues (Chart V). To quote:

“We wanted to learn how and why the occurrenceshappened and what the company is doing to preventfurther incidents.”

“We had concerns over [the] safety record ofcompany and wanted to understand further theapproach to safety taken by the board.”

“… we raised a number of governance and Health &Safety issues, which highlighted systemic issues interms of how the firm has managed its operationalrisks. We asked the company how it is addressingthese issues and what steps the firm has taken to

manage/ limit the negative media coverage, and thepotential financial impact of litigation and customerrefunds, not least the outstanding litigation fromCosta Concordia sinking …”

Three respondents were concerned with strategy. Oneengaged on strategy and financial performance andanother on governance and operational issues “in thecontext of strategy and managing ESG risks”. The thirdcovered a range of issues that included “pricing strategy,[Carnival’s] reliance on third party distributors for makingsales, the quality of the company’s ships and potentialchanges in the Board and management structure”.

Two respondents engaged in order to better understand,and receive clarification and assurance over thebusiness and one to raise concerns regarding board andcommittee composition and remuneration.

Of the two “other” respondents, one registered votesagainst Resolutions 15 and 16 to re-appoint PwC asauditors and to authorise the Audit Committee to agreethe auditor’s remuneration, and the other wrote to theCompany Secretary to notify and explain the rationalefor not supporting some resolutions at the AGM.

Only one respondent changed its interest as a result inthat it increased its holding as it became more confidentthat the company “was making progress in addressingthe challenges facing it”.

Chart V: Engagement with Carnival – No. of respondents

Understanding2

Other2

Remuneration andboard/committee

composition1

Health andsafety and governance2

Strategy3

Health andsafety

2

Carnival plc

12 Business.time.com 21 March 201313 Forbes.com 25 June 201314 Seekingalpha.com 17 April 2013

http://seekingalpha.com/article/1349411-carnivals-ceo-hosts-annual-general-meeting-transcript

http://www.forbes.com/sites/abrambrown/2013/06/25/carnival-tries-to-stay-afloat-as-billionaire-ceo-steps-down/

http://business.time.com/2013/03/21/in-the-wake-of-ugly-incidents-at-sea-the-cruise-industry-is-in-hot-water/

19

Detailed Practical Examples – Carnival plc

Ten respondents with a holding did not engage withCarnival mainly because their interest was too smalland/or held within passive funds, or the company did not meet their engagement criteria. Two respondentshad engaged in 2012. One had “satisfactory”communication with the company and one stated that itwas aware of the incidents but did not feel that changein top management would be the best solution.

OutcomeThree respondents considered their engagementsuccessful. One explained that it continued to hold itsinterest in the company and the other two stated:

“We maintained a constructive dialogue with thecompany throughout this period and the companyhas recently taken steps to bring its Board structuremore into line with the UK Governance Code andhas split the role of Chairman and CEO; a step wehad long desired. Further Board changes areexpected.”

“We voted in accordance with our views. We countthis as fully effective and await managementresponse.”

Half of the respondents that engaged considered theirengagement partly successful. Three consideredCarnival’s response to the issues raised to beencouraging but intend to continue monitoring thecompany. The other two stated15:

“We welcome the decision to split the CEO/Chairroles, particularly as we had voted against MickyArison’s joint role every year. However, we are slightlysceptical about whether this change would havetaken place if it wasn’t for the Company’s really poorsafety record in 2012/13. More still needs to bedone on governance including remuneration andalso on H&S issues.”

“Many of the issues we raise are long-term issuesand it takes longer than a few months to see theimpact and success or not of the engagement.Whilst immediate changes may not be apparent and

we are unable to determine how our engagementwas received internally, we encouraged the companyto adopt best governance, environmental and socialpractices.”

One respondent considered their engagement to be oflittle success and for another two engagement wasunsuccessful with one explaining: “We find Carnival avery difficult company to engage with as access toindependent directors is very limited. The engagementis ongoing however, and we will continue to seek ameeting with the Chairman, Mr Arison, to discuss thevariety of material ESG risks that exist at Carnival.”


Contact with Carnival

There was a total of 31 contacts by ten respondentsmaking an average of just over 3 contacts perrespondent. One respondent did not have any contactwith the company and another does not keep a recordof the number of times it engages with an individualcompany as it has no external clients to report to.

Most of the communication was with Investor Relations– 17 contacts by six respondents – and ExecutiveDirectors – 13 contacts by eight respondents. Fiverespondents contacted the Chairman eight times intotal. Carnival’s Management and Secretary werecontacted twice by two respondents each (Table XIV).

Table XIV: Number of contacts and who with


Chairman 8 5



Management 2 2



15 One did not explain.

20


Contact was mainly by portfolio managers and analysts– 21 contacts for six respondents. For five respondentssix contacts were by dedicated specialists only. Forthree respondents four contacts were by portfoliomanagers/analysts and specialists jointly (Table XV).

Table XV: Number of contacts and who by






Three of the twelve respondents that engaged did so incollaboration with other investors. One had a jointmeeting with the company after being approached by anestablished group. One initiated a joint letter withanother investor and another initiated a joint letter withanother investor and also agreed to vote the same way.

All three respondents considered the collaborationeffective.

2013 AGM

None of the respondents attended the AGM.

Resolution 1, to re-elect the Chief Executive, MickyArison

Seven respondents voted for Resolution 1 to re-elect theChief Executive (Table XVI). Three considered that theroles of CEO and Chairman should be split but felt thatMicky Arison was the right person for Carnival. Tworespondents did not consider this the right time for achange in executive management but voted against theremuneration report. The other two were generallysupportive of the company and its management and didnot consider the dual role of Chairman and CEO anissue.

The five respondents that voted against this Resolutiondid so because they were concerned by the combinedrole. They were also uneasy with a range of other issues.To quote:

“… The Arison family are also major shareholders inthe company. Succession planning is not clear.These arrangements are seen as a risk to the longterm leadership in the company. While a performanceevaluation for the board was undertaken, this wasinternally organised.”

“… We also raised concerns regarding: the lack ofalignment between the remuneration policy and thelong-term interests of shareholders, the tenure of theincumbent audit firm, safety and labour issues,political donations.”

Three of the five respondents that voted against thisResolution informed the company of their decision.

Resolution 3, to re-elect Executive Director ArnoldDonald

Half of the respondents that engaged voted in favour ofResolution 3 as they remained supportive of Carnival’smanagement and did not believe that removing ArnoldDonald would be in shareholders’ interests. At the sametime, the other half voted against this Resolution, mainlybecause they did not consider Arnold Donald to beindependent due to “tenure and outstanding options”and they already felt that the Board lacked sufficientindependent directors. Respondents also added:

“… [Arnold Donald] sits on the remunerationcommittee which we consider as inappropriate asthe committee should consist entirely of independentdirectors.”

“[Arnold Donald is] Chair of the RemunerationCommittee and member of the Audit Committee.[He] receives remuneration other than director feesfrom the company.”

Three of the six respondents that voted against thisResolution informed the company of their decision.

21

Detailed Practical Examples – Carnival plc

Table XVI: Resolutions 1 and 3

Resolutions 1 3

No. of respondents

For 7 6

Against 5 6

Abstain 0 0

Conflicts

None of the respondents with a holding in Carnivalreported conflicts of interest.

22


Background

In October 2012 the Government cancelled the deal toaward First Group the West Coast franchise awarding itto Virgin Rail instead. As a result, First Group’s shareprice fell.

On 20 May 2013 First Group announced a rights issueto raise up to £615 million for investment into thebusiness and to reduce its debt.16 On 26 June, the dayafter the offer closed, the company announced that 87per cent of the shares offered had been taken up at 85pence.

Furthermore, Martin Gilbert, the company’s Chairman of27 years announced his plans to resign after the rightsissue.17 Nearly 23 per cent of those who voted did notsupport Resolution 4, to re-elect Martin Gilbert, at theAnnual General Meeting on 17 July 2013.

Resolution 2 to approve the Remuneration Reportreceived nearly 30 per cent of votes against. Resolution17, to authorise the company to make politicaldonations and incur political expenditure received almost12 per cent of votes against.

Objectives

Out of the twenty respondents with a holding in FirstGroup, eleven engaged. The level of fees connectedwith the rights issue was the main concern for fourrespondents, two of which also wanted to replace theChairman (Chart VI). To quote:

“We had concerns regarding effectiveness of theBoard and management and were seekinginformation regarding the future direction of thecompany, in particular board refreshment andselection of a new Chairman. We had raised withother shareholders the level of fees incurred from theRights Issue.”

“Hopefully, a message [was] sent to the advisers thatfees were too high.”

“Key engagement objectives with FirstGroup in theyear ending September 2013: ensure effectivemanagement of the balance sheet, including

management and oversight of debt level [and]improve communication to the market. As the yearprogressed the objectives were revised to include:concern regarding the rights issue, ensureappropriate replacement for the Chairman.”

Three respondents focused on either board orremuneration issues or both:

one focused on “a change of board chairman andboard culture” and wanted remuneration to become“more aligned with shareholders’ interests”.

one raised concerns on remuneration.

one aimed at “board refreshment including new Chairman”.

Two respondents wanted a better understanding and forthe two “other”:

one wanted information on the cause and impact ofthe cancelation of the West Coast franchise.

one informed the Company Secretary of its votingintentions ahead of the AGM and sought a meetingwith the Senior Independent Director.

Only two respondents changed their holding as a result.One reduced its interest while the other increased it byparticipating in the rights issue.

Chart VI: Engagement with First Group – No. of respondents

Understanding2

Other2

Fees on rightsissue2

Board and/orremuneration3

Fees on rights issueand Board Chairman

2

First Group plc

16 Telegraph.co.uk 20 May 201317 Guardian.co.uk 17 July 2013

http://www.theguardian.com/business/2013/jul/17/first-group-shareholders-vote-chairman-pay

http://www.telegraph.co.uk/finance/newsbysector/transport/10067929/Troubled-FirstGroup-announces-rights-issue-as-chairman-Martin-Gilbert-steps-down.html

23

Detailed Practical Examples – First Group plc

Nine respondents with a holding did not engage. In mostcases, this was due to the holding being too small.Additionally, one respondent felt that engagement wouldnot impact value and another divested to exit the holding.

Outcome

One respondent considered its engagement successfulas two new non-executive directors were appointed andMartin Gilbert announced his intention to step down.

Six respondents18 considered their engagement partlysuccessful, as it is on-going and a new Chairman hadnot been found19. To quote:

“Work [is] in progress as the search for areplacement chairman is still underway, monitoring ofstrategy and performance is ongoing, and [Manager]will be reviewing the remuneration policy andimplementation report to monitor progress in itsremuneration practices.”

“We continue to monitor the company. The searchfor a new Chairman and the appointment of thecorrect individual is crucial.”

“The chairman remains in place and the companyhad to return to shareholders to seek more capitalthrough a rights issue. We had been concernedabout the company’s ability to deal with the failure inthe allocation of the franchise as well as otherpossible issues in the company. In addition we hadpreviously discussed succession but little appearedto have progressed.”

Two considered their engagement of little success, oneas no new Chairman had been appointed at the time,and the other explained that: “It was helpful tounderstand the background behind the deeplydiscounted rights issue and the costs involved but it didnot give us much confidence in the board given therehave been a string of poor decisions and lack ofoversight. We got the impression that non-executivescan’t deal with such delicate issues on their own. Theyhave no choice but to pay for external advice. On payissues, there is to be a remuneration review in respect ofbonus and LTIP plans during 2013/14 which should

provide potential for improvement”.

One respondent that had voted against the rights issueconsidered its engagement unsuccessful.


Contact with First Group

There were 31 contacts in total by nine respondents, anaverage of 3.4 times per respondent. Most contactswere with the Chairman and the Executive Directors –eight times each by five and four respondentsrespectively. There were four contacts each with theSenior Independent Director and the CompanySecretary by three and four respondents, respectively.One respondent contacted management three times(Table XVII).

Table XVII: Number of contacts and who with20


Chairman 8 5



Management 3 1


In the majority of cases, the company was contacted byboth portfolio managers and analysts and dedicatedspecialists (Table XVIII). For three respondents, elevencontacts were by portfolio managers and analysts andfor five respondents eight contacts were by thededicated specialists.

Table XVIII: Number of contacts and who by





18 One did not state either way.19 At the time of the survey. John McFarlane was appointed to the Board of First Group in December 2013 and became Chairman in January 2014. Source: BBC.co.uk

6 December 2013.20 One respondent stated that it had five contacts with company brokers.

http://www.bbc.co.uk/news/uk-scotland-scotland-business-25258404

24



Two respondents collaborated with other investors byattending a joint meeting with the company after beingapproached by established groups. Both respondentsconsidered the collaboration effective.

2013 AGM

Of the respondents that engaged, ten did not attend theAGM21.

Resolution 4, to re-elect the Chairman, MartinGilbert

Seven respondents voted in support of Resolution 4, tore-elect Martin Gilbert as Chairman (Table XIX) with themajority explaining that this followed reassurance that asuccessor was being sought and that he would stepdown on the new appointment.

Three voted against the re-election and clarified:

“[Manager] wanted a change of the board chairmanand board culture.”

“Management performance was questionable duringthe period, giving us concerns regarding the re-election of the Chairman.”

“Given the necessity for the recent deeply discountedrights issue and the performance issues faced by theCompany, and whilst we noted Mr Gilbert’s intentionto step down from the Board once his successor isappointed, we were concerned about the lack ofproper stewardship on the Board.”

Resolution 17, to authorise the company to makepolitical donations and incur political expenditure

All ten respondents voted in favour of Resolution 17 togive the company authority to make political donations.For example, one respondent stated: “Support for thisresolution was warranted because the Company statedthat it does not intend to make overtly political paymentsbut was making the technical proposal in order to avoidinadvertent contravention of EU legislation. Also, theauthority was limited to £100k and 12 months.”

Table XIX: Resolutions 4 and 1722

Resolutions 4 17

No. of respondents

For 7 10

Against 3 0

Abstain 0 0

All three respondents that voted against Resolution 4,informed the company of their decision.

One respondent explained that it voted in favour of bothResolutions but it also “raised concerns regarding thecash recruitment award made during the year for thenew Finance Director. [It] also informed the companythat, post the rights issue, [it] did not consider a generalauthority to issue shares was required.”

Conflicts

Of the eleven respondents that engaged, three reporteda conflict of interest. For one it involved a relationship ata senior executive level and was addressed by followingthe voting recommendation of its research provider.Another had a conflict due to a First Group directorbeing a client. It sought the client’s decision in relation tothe exercise of voting rights. For the third, the conflictarose as First Group is a client. The respondentaddressed it by “following [its] conflicts of interest policyand taking the voting decisions on an arm’s lengthbasis”.

21 One respondent did not state whether it attended.22 One respondent did not provide any details regarding voting of Resolutions 4 and 17.

25

Detailed Practical Examples – Glencore Xstrata plc

Background

The merger of Glencore and Xstrata to create GlencoreXstrata was completed on 30 April 2013. The deal hadbeen delayed by shareholders’ concerns over boardindependence and the remuneration plans for themerged company.

The merged company’s first Annual General Meetingwas on 16 May 2013. The re-election of four directors(all previously with Xstrata) including the Chairman, SirJohn Bond, was not supported. Resolution 7, to re-electSir John Bond, received 81 per cent of votes against. Itwas announced that the former BP Chief Executive,Tony Hayward, would be interim Chairman23.Resolutions 9, 10, and 11 to re-elect Ian Strachan, ConFauconnier, and Peter Hooley received 64, 75 and 57per cent of votes against, respectively.

Resolution 16, to approve the Remuneration Reportreceived 22 per cent of votes against.

Objectives

Twenty-seven of the 36 respondents with a holdingengaged with Glencore Xstrata. Approximately halfengaged on issues surrounding the merger either aloneor in conjunction with issues around board composition,succession and remuneration (Chart VII). To quote:

“Before the merger was finalised we had beenengaging with both companies to withdraw from thetransaction …. Subsequent to the merger, ourengagement around the AGM focused on ouropposition to the remuneration report andtermination payments to Xstrata’s CEO as well as there-election of the company’s chairman. Following theAGM we debated the backgrounds and skill sets theboard is looking for in a new chairman andimpressed upon the company the importance ofgood process, including consultation with outsideshareholders. We also continued to challenge theintegration of the two companies and explore thereconciliation of the cultural and commercialdifferences of the two organisations. We have also

been engaging to impress the need for GlencoreXstrata to consider in more detail sustainability issuesand risks, including bribery and corruption.”

“… We had concerns that the merger transactionwould not deliver appropriate value to us asshareholders in Xstrata. … we continued to engageon issues with the remuneration of Xstratamanagement as part of the merger and on thecomposition of the Glencore Xstrata board.”

“We initially engaged with the company to hearmanagement’s view on how it found the initial mergerterms satisfactory and to share our disagreement.After the publication of the retention package, wewanted to let the company know that we disagreedwith this as well.”

For four respondents the main concern was the newentity’s strategy and governance. For example:

“…Although [Manager] remained opposed to thedeal, [Manager] decided to retain its shareholdingand establish a post-merger engagement plan withthe merged entity covering strategy, managementand governance issues, notably board compositionand the search for a permanent Chairman.”

“… The portfolio manager held several meetings withmanagement on the strategy of the combinedgroup.”

Four respondents wanted a better understanding onissues such as strategy, the priorities of the new entity,health and safety, and environmental risk management.

Two respondents only engaged on remuneration and afurther two on board composition.

Six respondents changed their holding as a result oftheir engagement. Four increased it with one statingthat it went from zero to a small positive holding. Tworeduced it, one explaining that this was due to theengagement only being partly successful and the otherthat it “largely sold out” of its position.

Glencore Xstrata plc

23 News.com.au 17 May 2013

http://www.news.com.au/finance/business/glencore-xstrata-agm-dumps-chairman/story-e6frfkur-1226644897969

26


Chart VII: Engagement with Glencore Xstrata24

– No. of respondents

Nine respondents had a holding but did not engage25.For five, this was due to too small a holding. For one,issues were covered by proxy voting service, one had ashort position and one chose not to engage but did notexplain why not.

Additionally, one respondent without a holding wasmember of a coalition partnership that engaged with thecompany although the respondent did not have directcontact with it.

Outcome

Two respondents did not consider they achieved theirobjectives. For one, the company was not available for ameeting and for the other – despite its engagement – nochanges were made to the board candidates.

Moreover, five respondents considered theirengagement to be only of limited success mainly due tothe slow progress in appointing a new Chairman andrefreshing the composition of the board. To quote:

“The company hasn’t been very responsive to ourconcerns on pay or environmental and social

issues… we remain concerned regarding theappointment of a new Chairman as there appears tobe a limited short-list of candidates available in thenew term”.

“… [the proposed retention payments] were voteddown but the outgoing CEO still received excessivepayments. The composition of the Board remainsunsatisfactory with the company yet to appoint apermanent, new Chairman and with the independentrepresentation on the Board remaining weak”.

The majority of respondents (sixteen) considered theirengagement to be partly successful as some of theirobjectives such as change of Chairman, improvementsin remuneration structure and offer terms for Xstratawere achieved. However, for several, engagement wason-going and a permanent Chairman was still to beappointed. For example, respondents stated:

“The portfolio managers … gained an understandingof management’s view of the company andcomponent businesses. On governance-relatedissues, the search for a permanent Chairman is on-going and this, together with composition of theboard, is being monitored.”

“Offer terms were improved for Xstrata, and themanagement incentives were changed. Miningshares however have been a poor performer and it istoo soon to have seen benefits from the merger.”

“… There is an ongoing need for Glencore to appointfurther directors to the Board and a new Chairman totake over from the interim Chairman. This process isstill ongoing and we continue to engage with theBoard on the appointment of the new Chairman.”

Only one respondent achieved its objectives in full andstated that it had “voiced concerns over elements of thetakeover, director independence and remuneration”.

Understanding4

Remuneration2

Merger6

Merger, boardand remuneration8

Strategy and/orgovernance

6

Board2

24 Excludes one respondent that stated it engaged but did not provide any further details as to its objectives.25 One respondent with a holding did not state why it did not engage with Glencore Xstrata.

27



Contact with Glencore Xstrata

There were 105 contacts by 25 respondents, anaverage of 4.2 per respondent. Most contact was withthe Executive Directors with 50 contacts by 19respondents, followed by Investor Relations with 32contacts by 15 respondents. There were 20 and 14contacts with the Chairman and management,respectively (Table XX).

Table XX: Number of contacts and who with


Chairman 20 10



Management 14 7



Contact was mainly by dedicated specialists andportfolio managers/analysts separately – 51 and 41,respectively. Jointly they had 31 contacts for tenrespondents (Table XXI).

Table XXI: Number of contacts and who by






Of the 27 respondents that engaged, twelvecollaborated with other investors. Eleven attended jointmeetings with the company and one entered anagreement to vote the same way (Table XXII).

Nine respondents stated that the collaboration wasinitiated by an established investor group whereas twoapproached individual investors and established groups.

In just one case the collaboration was not effective,however, the respondent did not provide additionalclarification.

Table XXII: Collaboration

No. of respondents



Other 0

2013 AGM

None of the respondents with a holding attended thecompany’s AGM.

Resolution 7, to re-elect the Chairman, Sir JohnBond

The majority of respondents that engaged eitherabstained or voted against the re-election of Sir JohnBond mainly due to their dissatisfaction with hisoversight of Xstrata during the merger and the proposedretention payments (Table XXIII). To quote:

“We do not support the election … given ourdisappointment with the role he played as Chairmanof Xstrata during the negotiations leading up to themerger. He was also a member of Xstrata’sremuneration committee and therefore accountablefor making controversial remuneration proposals afundamental condition of the merger.”

“We voted against … due to serious concerns abouthow he managed the merger …. We recognised thathe indicated he will resign if there is significantshareholder dissatisfaction of this nature. We choseto support all other directors despite similarconcerns because we felt it was important to get theright chair before revisiting the board compositionmore broadly.”

“At the time of the 2013 AGM, we had concernsregarding: John Bond’s handling of the mergerbetween Glencore and Xstrata and did not supporthis continued involvement on the board of thecombined entity. Additionally, we raised concernsregarding: severance pay arrangements for MickDavis; auditor independence further to the continuedsignificant level of non-audit fees and the audit firms’role as remuneration consultants.”

28


These concerns were shared by the three respondentsthat abstained given the proposal for Sir John Bond tobe an interim Chairman.

Eight respondents supported this Resolution mainlybecause they felt that his removal could affect boardstability and give too much power to the incumbentCEO. Comments included:

“… we were satisfied that board renewal was beingprogressed. We accepted that the process wouldtake time and considered board stability to beimportant in the interim period in order to reduce therisk of disruption to the integration process.”

“As Sir Bond is to serve only on an interim basis, theenlarged group could benefit from Sir John Bond’sexperience in the early stages of integration.”

Resolution 9, to re-elect Ian Strachan as a director

The majority of respondents supported the re-election ofIan Strachan particularly given that he was not amember of the main committees and there was nosuccession plan. To quote:

“Whilst we were not supportive of Mr Strachan’scontinuation on the Board on a long term basis …we thought it was a mistake to vote him off theBoard before successor Directors had beenappointed.”

“We chose to support the election of Ian Strachangiven his extensive experience although we did notagree with [the] company’s assessment of hisindependence. We did not however feel that theoverall structure of the board would be compromisedby his appointment and therefore supported hiselection.”

“Although not classed as independent Ian Strachanhad no committee responsibilities prior to themerger.”

Respondents voted against Resolution 9 due to the waythe Xstrata directors handled the bid process.Explanations included:

“[We had] concerns over their conduct on behalf ofshareholders during merger negotiations [and]concerns over independence (tenure).”

“We believed that the Xstrata directors had not actedin the best interests of us as shareholders in Xstrata

and [they] have responsibility for contentiousremuneration practices. Therefore [we] were notcomfortable with them continuing as directors of thenewly merged Glencore Xstrata.”

Respondents that abstained explained that althoughthey questioned his independence due to the length ofhis service and wanted a refreshed Board in that therewere “insufficient independent representatives on theboard”, they did not take a stronger position given thathe was not a member of the Remuneration Committee.

Resolution 10, to re-elect Con Fauconnier as adirector

More respondents voted against the re-election of ConFauconnier than against Ian Strachan due to theformer’s membership of Remuneration Committee.Another reason was dissatisfaction with the way themerger was handled. For example, respondents stated:

“The director was held accountable for the poordesign of the remuneration program.”

“[He] had supported high management incentives atXstrata.”

Respondents that abstained were concerned about hisrole on the Remuneration Committee but recognisedthat he was independent in a board that was largelynon-independent. For example, one respondentexplained: “This vote reflects our concerns over his pre-merger position as a member of the XstrataRemuneration committee which proposed controversialand excessive remuneration arrangements as afundamental condition of the merger (which fortunatelyshareholders voted down). A tougher voting stance wasnot considered warranted given that he is anindependent director on a Board which includes anumber of non-independent Directors.”

Fourteen respondents voted in support of the re-electionof Con Fauconnier due to the lack of independentdirectors in the merged company. To quote:

“We did not feel that further changes to the boardwere necessary, given the recent merger and [the]requirement for a new Chairman.”

“Con Fauconnier will be an independent director on aBoard which includes a number of non-independentdirectors.”

29


Resolution 11, to re-elect Peter Hooley as a director

One respondent abstained and three voted againstResolution 11, to re-elect Peter Hooley, again due to thegeneral dissatisfaction over the merger and the viewthat Xstrata directors had not acted in shareholders’best interests.

However, the majority voted in support mainly becausePeter Hooley was considered to be sufficientlyindependent. For example:

“Support was considered appropriate given he is anindependent director who did not sit on the Xstrataremuneration committee.”

“We recognised Peter Hooley as an independentdirector with requisite experience and financialexpertise and supported his election.”

“[This] Director met our criteria for independence,and there were no concerns as to his conduct.”

Table XXIII: Resolutions 7, 9, 10 and 11

Resolutions 7 9 10 11

No. of respondents

For 8 17 14 22

Against 15 6 9 3

Abstain 3 3 3 1

Of the respondents that abstained or voted against atleast one of these resolutions, nine informed thecompany of their decision but nine did not.

Conflicts

Three respondents reported conflicts of interest. Asubsidiary of one respondent was an advisor to themerger and addressed the conflict by establishing a‘Chinese Wall’ between its investment banking andasset management divisions. For the other tworespondents a conflict arose as they held shares in bothcompanies prior to the merger. One clarified that on anet value basis it held more of Glencore than Xstrata.The other addressed the conflict by using a “fiduciaryframework” to make its voting decision for eachcompany. For this it took into account “what was betterfor absolute rather than the relative performance of thefunds”, as the latter would be more important for itsbeneficiaries.

30


Background

During 2012, Lonmin, the South African miner, facedviolent strikes resulting in closures at its mines, andincurred a pre-tax loss of US$698 million.

On 9 November 2012, the company announced a rightsissue in order to raise approximately US$777 million tostrengthen its overall financial position. When the offerclosed on 1 December, 97 per cent of the total rightsoffered had been taken up.

At the Annual General Meeting on 31 January 2013,Resolution 5, to re-elect Roger Phillimore received 25per cent of votes against. Resolution 15, to givedirectors authority to allot shares was approved only by62 per cent of votes.

On 1 July 2013, Bennetor Magara was appointed as theChief Executive and was tasked with the company’sturnaround plan and improving industrial relations. Thecompany have since been negotiating with the unions,and were reportedly close to a deal.

Commenting on Mr Magara’s appointment, LonminChairman Roger Phillimore said: “Our renewal plan is ontrack and progress is being made towards the betterdefinition and achievement of our initiatives to improveboth the working and living environment of all Lonminemployees for the benefit of all stakeholders andshareholders. The board is confident that Ben’sextensive experience in working in South Africa and themining community, his relationships and hisdemonstrated success in proactive relationship buildingwith all stakeholders will drive Lonmin forward26”.

Objectives

Out of the 13 respondents with a holding, eight engagedwith Lonmin. The main concerns were in regards to thestrikes at the Marikana mines and remuneration (ChartVIII). To quote:

“We sought to achieve a fuller understanding of therationale behind the CEO’s partial bonus for 2012and the retention award to the CFO. Further, we

sought to question the company regarding stepstaken to address the root causes of labor unrest inSouth Africa.”

“We wanted to challenge the company’sunderstanding of and response to the Marikanaissues. We were not convinced at the time that theboard had a full understanding of the human capitalissues the company faces as a platinum miner inSouth Africa. We also wanted to understand some ofthe remuneration decisions made during the year,particularly around the payment of bonuses following40 deaths at the Marikana mine and the rights issue.Subsequent to the AGM we welcomed theremuneration committee’s decision to tighten themetrics under the incentive schemes and place moreemphasis on social issues. We were also pleased tohear that the company has focused its attention onensuring full union representation, revisiting thestructure of the labour force to consider whethermore could be done to promote local staffing, andensuring improved housing for the workforce. Lastly,we wanted to discuss the company’s search for anew CEO and its response to a potential bidder.”

Additionally, two respondents wanted to betterunderstand the situation at the Marikana mines. Forexample, one stated it wanted to gain some “clarificationand deeper understanding of what was a volatilesituation”.

Two respondents focused on remuneration andLonmin’s performance with one wanting to“communicate dissatisfaction with companyperformance, the rights issue and executiveremuneration” and the other to “discuss [its] vote at theirAGM on the remuneration item, so that [it] could letthem know [its] views on this item”.

The one “other” respondent engaged to “supportmanagement in a difficult political situation”.

Two respondents changed their holding in Lonmin withone explaining that it increased it by participating in therights issue.

Lonmin plc

26 Telegraph.co.uk 2 April 2013

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/9966877/Lonmin-appoints-Anglo-veteran-Ben-Magara-as-new-chief.html

31

Detailed Practical Examples – Lonmin plc

Chart VIII: Engagement with Lonmin – No. of respondents

Five respondents with a holding did not engage, thereason being that their holding was too small.

Outcome

All eight respondents that engaged achieved theirobjectives, at least in part.

Some had a more positive view of their engagement.For example, one respondent that engaged onremuneration and the labour unrest considered thatLonmin took its concerns seriously by altering theremuneration framework and making it “more reflectiveof the company’s social responsibilities, including laborrelations with the unions, the use of migrant workers,enhancing the living accommodations for employees,and requirements that migrant workers return homemore often”. Another held Lonmin’s board accountablefor the oversight of human capital issues and noted that“the company has increased [its] transparency andwillingness to engage with shareholders”. Moreover,one respondent stated that it now has a betterunderstanding of issues that affect all companiesoperating in the area.

Other respondents were not as certain about theeffectiveness of their engagement. To quote:

“While Lonmin now has a permanent CEO and wehave seen some improvements in its pay schemesand its approach to industrial relations we believemore time is needed to judge whether it has been

entirely effective, particularly on the latter point.”

“We had no option but to support the rights issue asthis was required to avoid the company breachingbanking covenants.”


Contact with Lonmin

Eight respondents that engaged had a total of 23contacts, an average of 2.9 each. The CompanySecretary was contacted the most with seven contactsby four respondents. The Chairman and theManagement were each contacted five times by fourand two respondents, respectively. Three respondentscontacted the Chair of the Remuneration Committee,once each (Table XXIV).

Table XXIV: Number of contacts and who with


Chairman 5 4




Management 5 2



Contact was predominantly by dedicated specialists – atotal of seventeen contacts for six respondents (TableXXV). For three respondents, specialists and portfoliomanagers/analysts had seven contacts. Portfoliomanagers and analysts alone had two contacts for justone respondent.

Table XXV: Number of contacts and who by





Understanding2

Other1

Performance and/orremuneration2

Remunerationand strikes3

32



Three respondents engaged with Lonmin incollaboration with other investors. Two attended jointmeetings with the company and the third one took partin an informal discussion at an industry forum.

In all three cases, the collaboration was initiated bysomeone else. For two respondents this was anestablished group and the third was approached by aninvestment bank that has a specialist SustainabilityTeam.

Only one respondent did not consider the collaborationto be effective.

2013 AGM

Of the eight respondents that engaged, six did notattend its AGM27.

Resolution 5, to re-elect the Chairman, RogerPhillimore

All respondents voted in support of Resolution 5, to re-elect the Chairman (Table XXVI). Some explained thatthis was due to investigations into the Marikana eventsbeing still in progress at the time of the AGM. To quote:

“…while there had been labour issues at thecompany during this period, we believed that theAGM was being held at a time when it was too earlyto apportion blame to individual directors as theformal investigations into the issues had not beenconcluded.”

“A definitive understanding of the events at Marikanais likely to emerge only upon completion of thejudicial commission of inquiry that has beenestablished. It appears too early to make a strongcase for voting against individual Directors at thisstage, but shareholders will wish to see concreteevidence of progress against the Company’s newpriorities as time goes on.”

One respondent supported the Chairman’s re-electionbut voted against the re-election of two other directors.To quote: “we opposed the re-election of … JonathanLeslie who is the Chair of the safety and sustainabilitycommittee who have oversight responsibility of many ofthe issues underlying the events, and Matamela CyrilRamaphosa who was the chair of the transformationcommittee of the board in the run up and through theevents and had responsibility for oversight housing andquality of life for employees”.

A further two respondents expressed their concern withthe board’s performance by voting against theremuneration report.

Resolution 15, to authorise directors to allot shares

Resolution 15 to authorise directors to allot shares wassupported by all respondents because, as severalexplained, the proposed issue was within recommendedlimits. One clarified that “… in light of the rights issueand in recognition of the views of many of its SouthAfrican institutional shareholders, the [Lonmin] Boardhas decided not to seek an allotment authority over anadditional 33.3% (as would be standard UK practice),and is not seeking an authority to disapply pre-emptionrights”.

Table XXVI: Resolutions 5 and 15

Resolutions 5 15

No. of respondents

For 8 8

Against 0 0

Abstain 0 0

Conflicts

Out of the thirteen respondents with an interest in thecompany, twelve did not have any conflicts of interest28.

27 Two did not state if they attended.28 One did not state whether it had conflicts of interest or not.

33

Detailed Practical Examples – Redrow plc

Background

In September 2012, Steve Morgan, Executive Chairmanand majority shareholder, revealed plans to make anoffer for the company as part of a consortium with twoother shareholders.

One shareholder complained to the Takeover Panel thatthe bid was unfair to small shareholders29. There werefurther concerns that due to the consortium’s combinedholding of over 50 per cent, the Takeover Panel wouldnot grant “joint offerer” status. The consortium eventuallyterminated discussions and did not proceed with theoffer by the September deadline.

At the Annual General Meeting on 12 November 2012,nearly a quarter (24 per cent) of shareholders votedagainst Resolution 5, to re-appoint Alan Jackson, theNon-Executive Deputy Chairman, and almost 9 per centvoted against Resolution 6 to re-appoint Debbie Hewitt.

One shareholder commented: “we felt the independentdirectors were extraordinarily weak throughout the wholeprocess. They allowed executives to get very close tothe bidders and effectively become part of the biddingteam. Their job is to stand up for the rights of allshareholders. They quite plainly did not do that”30.

Objectives

Five out of nine respondents with a holding engagedwith Redrow. The main concern was the proposedtakeover (Chart IX). To quote, engagement was:

“… to prevent the company from being taken privateat a price of 152p per share.”

“To get independent non-executive directors to seekimproved offer terms for the company. Also to seekmore independent directors to represent theshareholders who were not part of the offeror’sgroup.”

“To highlight our concerns that: At the EGM in May2012, our support for the Rule 9 waiver (Mr Morgan’sshareholding increased from 29.95% to 40.4%) was

a consequence of the reassurances that thecompany supplied that Mr Morgan did not intend to‘seek any change in the composition of the Board orto the general nature or any other aspect of theCompany’s business’. Yet in August 2012 MrMorgan led a takeover offer with Tosca fund andPenta Capital that significantly undervalued thebusiness in our opinion. The non-executive directors(with the exception of one individual) had failed torepresent minority shareholder interests. We alsosought to understand the events leading up to theresignation of non-executive director Paul Hampden-Smith.”

Of the two “other”, one’s engagement involved contactbetween a portfolio manager and the company, and theother wrote to the Company Secretary to explain why itwould not support a number of the proposed resolutionsat the AGM.

Only one respondent changed its holding as a result ofits engagement and acquired additional shares in orderto strengthen its position in discussions with thecompany.

Chart IX: Engagement with Redrow – No. of respondents

Two of the four respondents that did not engageexplained that this was due to their holding being toosmall. Of the other two, one did not think it would makea “material difference” to the value of their holding andthe other held stock for only one client in an ‘execution-only’ mode and had no mandate to vote.

Other2

Proposedtakeover3

Redrow plc

29 Telegraph.co.uk 3 October 201230 Theguardian.com 12 November 2012

http://www.theguardian.com/business/2012/nov/12/redrow-investors-weak-deputy-chairman

http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/9585253/Redrow-founder-Steve-Morgan-at-war-with-shareholder-over-bid.html

34


Outcome

One respondent considered its engagement successfulas the proposal to take the company private wasabandoned. The other four respondents considered theirengagement partly successful. Three provided details:

one raised long-term issues and needed more timeto assess the impact of its engagement.

one has on-going engagement to appoint moreindependent non-executive directors.

one voted against the re-election of the Chairman,Steve Morgan, who still holds this position.


Contact with Redrow

There were 26 contacts in total by four respondents; anaverage of 6.5 contacts each31. One respondent alonehad 19 contacts. The majority of contacts were withNon-Executive Directors – 12 contacts by threerespondents. Moreover, three respondents had eightcontacts with the Executive Directors and two had sixcontacts with the Chairman. Each of the SeniorIndependent Director and the Company Secretary hadtwo contacts by one respondent (Table XXVII).

Table XXVII: Number of contacts and who with


Chairman 6 2





The majority of contacts were by dedicated specialists –12 contacts by three respondents. For threerespondents, portfolio managers and analysts had eightcontacts. Furthermore, one respondent had sevencontacts through both specialists and portfoliomanagers/analysts (Table XXVIII).

Table XXVIII: Number of contacts and who by






Three respondents collaborated with other investors.Two attended joint meetings with the company, and onealso had extensive telephone contact with individualinvestors. The third sent a letter jointly with anotherinvestor.

In two cases, the respondent initiated the collaboration,one by approaching an established group and the otherby contacting investors individually. One respondent wasapproached by another investor.

All three respondents considered the collaborationeffective.

2013 AGM

None of the five respondents that engaged with Redrowattended its AGM.

Resolution 5, to re-appoint the Non-ExecutiveDeputy Chairman, Alan Jackson

Four respondents voted against Resolution 5 to re-appoint the Non-Executive Deputy Chairman, AlanJackson (Table XXIX). They explained that this was dueto the perceived failure to represent the interests ofminority shareholders. To quote:

“We were very dissatisfied with the manner in whichthe Senior Independent Director had represented theinterests of the outside shareholders in discussionswith the potential offeror. He failed to take a publiclead in pressing for a better price and indicated hiswillingness to recommend an offer which in ouropinion fell far below fair value. We also had widerconcern that he was too close to the Chairman.”

31 One respondent stated that it does not count the number of type of engagement but clarified that it “sends hundreds of letters and engages with a great number ofcompanies each year”.

35

Detailed Practical Examples – Redrow plc

“We had significant concerns regarding the strengthof minority shareholder representation on the Boardwhich is compounded by Steve Morgan’s executiverole and the recent resignation of Paul HampdenSmith. In light of recent developments, we urged thecompany to appoint an independent Chairman andappoint additional independent representation to theBoard forthwith.”

The one respondent that abstained clarified that thisreflected “this director’s chairmanship of the company’snomination committee, because of concerns aboutboard independence. Particularly given that [the]company combines the chief executive and chairmanrole in [an] individual who also has a controlling stake inthe company, we believe that the board should becomprised of a majority of independent directors toensure alignment of interests between the minorityshareholders and the controlling shareholder. We notethe recent resignation of one of the company’sindependent directors, which raises concerns about theclimate of independence on the board.”

Resolution 6, to re-appoint the Non-ExecutiveDirector, Debbie Hewitt

Resolution 6 to re-appoint the Non-Executive Director,Debbie Hewitt, was supported by all five respondents.To quote:

“[We] wished to retain [the] NED to protect ‘minority’shareholders.”

“We felt that a vote against the Chairman wassufficient”.

“In contrast to our interaction with Alan Jackson wehad generally very constructive discussions withDebbie Hewitt throughout the offer period.”

Table XXIX: Resolutions 5 and 6

Resolutions 5 6

No. of respondents

For 0 5

Against 4 0

Abstain 1 0

The four respondents that voted against Resolution 5informed the company as to why but not the onerespondent that abstained.

Conflicts

None of the respondents with a holding in Redrowreported any conflicts of interest.

36


Background

RSA’s profit before tax fell to £479 million for 2012 from£613 million for 2011. As a result, it cut its final dividendin respect of 2012.

Chief Executive, Simon Lee, commented that profits“have been impacted by the Italian earthquakes,extreme wet weather in the UK in the first half of the yearand falling bond yields….The board’s decision to rebasethe dividend is a prudent move that will enable us toinvest in the opportunities we see for growth and is inthe best interests of our shareholders32”.

The Chairman, Martin Scicluna, advised shareholders:“given the circumstances, we felt like the right optionwas to cut our dividend….This decision was a toughone to make. The share performance this year has beendisappointing so far but is largely a reaction to thedividend decision33”.

Shareholders also raised concerns about theindependence of RSA’s auditors Deloitte in that fees formanagement consulting services were far in excess ofthose for the audit. While RSA planned to change itsauditors to KPMG, questions were raised aboutconnections with the audit committee chair who hadbeen a long serving partner at KPMG. However, RSAreleased a statement that the audit committee’schairman “has no remaining financial or other interests inhis former firm. The Board is satisfied that Alastair is fullyindependent on this issue34”.

At the Annual General Meeting on 15 May 2013,Resolution 14, to appoint KPMG as the auditor, received99 per cent of votes in support. Resolution 9, to re-electAlastair Barbour, chair of the Audit Committee, received96 per cent of votes in support. Resolution 15, todetermine the auditor’s remuneration received 94 percent of votes in support. Resolution 3, to approve theRemuneration Report, received 91 per cent votes insupport. Directors received £4.3 million in respect of2012 as compared to £6 million for 2011.

Objectives

Eleven out of 21 respondents with a holding engagedwith RSA Insurance Group. In almost all cases, the mainconcerns were in relation to the company’s strategy, thedecision to cut the dividend and issues around thechange in auditor (Chart X). For example, onerespondent stated: “We had a number of concerns thatwere raised with the Chairman including the change tothe dividend policy which we believed was unnecessaryand badly communicated, concerns about thecompany’s strategy to make selected acquisitions inemerging markets and various issues about the changeto the company’s auditor”. Another wanted to havesome “clarification on the appointment of KPMG and[the] role of the chairman of the audit committee”.

Of the three “others”, one notified the company of itsvoting intentions35.

Two respondents changed their holding as a result oftheir engagement, one of which reduced its holding36.

Chart X: Engagement with RSA Insurance Group– No. of respondents

Nine respondents with a holding did not engage. Forone, this was due to a conflict of interest and anotherstated that it did not “feel the need to raise any particular

Audit1

Other3

Understanding1

Strategy and/ordividend cut5

Performance1

RSA Insurance Group plc

32 Proactiveinvestors.co.uk 20 February 201333 Bloomberg.com 15 May 201334 Economia.icaew.com 4 April 201335 Two did not state their objectives.36 One did not state.

http://economia.icaew.com/news/april2013/rsa-shareholders-question-deloitte-fees

http://www.bloomberg.com/news/2013-05-15/rsa-investors-approve-pay-plans-after-dividend-reduction.html

http://www.proactiveinvestors.co.uk/companies/news/53907/rsa-insurance-group-upsets-widows-orphans-with-divi-cut-53907.html

37

Detailed Practical Examples – RSA Insurance Group plc

issues/objections to what the company was doing”.Four did not because their holding was too small or inindex funds and one did not consider the issue to besignificant. Additionally, one respondent has a policy toengage only with companies listed in its domesticmarket which is outside the UK. Finally, onecommented that it “could not influence the boarddecision to cut the dividend. [The] announcement wasextremely price sensitive and was not discussed withshareholders in advance”.

In addition, there was one respondent with a holdingthat did not engage as it sold its shares during theperiod under review.

Outcome

Two respondents considered their engagementsuccessful with one clarifying that it had received allnecessary explanations from the company. Sixrespondents considered their engagement partlysuccessful, mainly due to it still being in progress. Toquote:

“A good response from the company meantengagement was constructive but it will take time toassess the impact of changes on shareholder value.”

“We will continue to see how the company dealswith the concerns raised in relation to dividend,strategy and audit work.”

“It is work in progress. We had concerns aboutaspects of the strategy and performance. Wediscussed the issues with the chairman and will waitto see achievements at the company’s results for2013. We also discussed the auditors. As a resultof the discussion, we understood the company’sposition and agreed with it. (The problem is thatthere are too few audit firms.)”

Only two respondents considered their engagement oflittle success, particularly due to the dividend cut. Onestated: “the company had provided assurance that itsclaims reserves were sufficient, and that it needed tomake emerging markets more profitable. However thedividend cut was a complete surprise.”


Contact with RSA Insurance Group

Nine respondents had a total of 40 contacts, an averageof 4.4 each. Most contact was with the ExecutiveDirectors and Chairman with 16 and 15 contacts byeight and seven respondents, respectively.Unsurprisingly given the audit issues, the AuditCommittee Chair was contacted seven times by sixrespondents (Table XXX).

Table XXX: Number of contacts and who with


Chairman 15 7



Audit Committee Chair 7 6




Contact was mainly by portfolio managers/analysts anddedicated specialists separately, the former having 16contacts and the latter 21. Jointly they contacted thecompany seven times for four respondents (Table XXXI).

Table XXXI: Number of contacts and who by






Seven respondents collaborated with other investorsmainly by attending joint meetings with the company(Table XXXII). Five of these meetings were initiated byother investors, primarily established groups. One

38


respondent wrote a letter jointly with other investors andanother on their own but with references to discussionsthey had with other investors. Both approached anestablished group. All seven found the collaborationeffective.

Table XXXII: Collaboration

No. of respondents



Other 2

2013 AGM

Two out of the eleven respondents that engaged withRSA attended its AGM in May 2013.

Resolution 9, to re-elect the Chair of AuditCommittee, Alastair Bardour

Nine respondents voted in support of Resolution 9 to re-elect the Audit Committee Chair mainly because theyhad been given a satisfactory explanation of hisindependence (Table XXXIII). One respondent alsoexplained that its concerns were rather about thecompany’s performance and not its audit.

Two respondents abstained from voting this resolutiondue to Alastair Bardour’s previous position at the newauditor, KPMG. In particular, they commented:

“… [the] new chairman of the Audit Committee, MrBarbour, is a former partner of the company’s newlyappointed audit firm, KPMG. In light of the potentialconflict of interest, we would encourage thecompany to appoint a demonstrably independentchairman to the Audit Committee during theforthcoming year. …”

“We had concerns about the lack of consultation withshareholders on the change of auditor. We do notbelieve that auditors should be allowed to give uptheir role as auditor in order to receive more lucrativeconsultancy appointments. In addition KPMG wereappointed to replace the existing auditors and we areconcerned about possible conflicts due to the factthat audit committee chair is a recently retired long-time partner of KPMG.”

Resolution 14, to appoint KPMG as the auditor

All respondents voted in support of Resolution 14 toappoint KPMG as auditor largely due to RSA’sexplanations. To quote:

“Constructive engagement facilitated improvedunderstanding of the issues raised.”

“We understood the company’s position and agreedwith it.”

“… we welcomed the rotation of the audit firmfollowing its appointment to undertake additionalconsultancy work.”

One respondent also explained that it was moreconcerned with the company’s performance than theaudit and another that it supported KPMG’sappointment as auditor.

Resolution 15, to authorise the Directors todetermine the auditor’s remuneration

All respondents but one voted in support of Resolution15 on the auditor’s remuneration. This was mainlybecause respondents felt that the company providedsufficient explanation of the situation and the auditor’sfees.

The one respondent that abstained explained that it hadhad extensive discussions with the company on auditorrotation and recognised that circumstances made theswitch “inevitable”. However, it stressed that in thefuture RSA should have a stricter approach regardingnon-audit services and noted its abstention “underlinesthe importance we attach to this happening”.

Table XXXIII: Resolutions 9, 14 and 15

Resolutions 9 14 15

No. of respondents

For 9 11 10

Against 0 0 0

Abstain 2 0 1

39

Detailed Practical Examples – RSA Insurance Group plc

All three respondents that abstained from votinginformed RSA of their decision.

Conflicts

One respondent with a holding had a conflict of interestas the company was a client. It did not engage.

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