Blog : BOARD TALK
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A blog around the issues facing the boardroom...in the UK and around the world. I aim to reflect a wide-ranging set of views and kindle ongoing and much-needed debate. The aim is for more 'board talk' and less 'bored talk'.
July 28, 2013
"Thought provoking, insightful and challenging – Board Talk is now the ‘go-to’ commentary on boardroom issues'
Vanda Murray, OBE (and non-executive director, now Chairman Fenner plc - 2017)
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|Posted on June 6, 2017 at 6:10 PM|
There is some good news, at least. The emphasis on environmental, social and governance (ESG) issues continues to grow despite Donald Trump.
FTSE Russell, the global index provider, has added 77 companies to its FTSE4Good index, with the largest number coming from the USA, which remains the largest contributor of companies to the index. It reveals in its June semi-annual review of the index that 31 companies have also been removed, reflecting the high standards required for companies to maintain inclusion.
Some 13 Japanese companies were added to the index alongside companies from a further 11 countries.
The 10 largest firms to be added to the index, in alphabetical order, are 3M Company, AIA Group Ltd, Analog Devices, Applied Materials, Celgene Corp, Colgate-Palmolive, IBM, KDDI Corp, Johnson Controls International PLC and Norfolk Southern Corporation. (my emphasis).
Companies in the index are assessed across over 300 data points, which are applied according to the industrial sectors and countries in which a company operates.
"The area of sustainable investment has changed dramatically with consideration of ESG factors now a core focus for most large institutional investors across asset owners, asset managers, consultants and bank" said FTSE Russell.
According to the latest data from the Global Sustainable Investment Alliance, there is now globally over $22 trillion of assets being professionally managed under responsible investment strategies, an increase of 25% since 2014, it said.
High quality ESG data is essential for the construction of FTSE Russell’s Sustainable Investment indexes and data.
In February, London Stock Exchange Group (LSEG) issued guidance, through its Global Sustainable Investment Centre, setting out recommendations for good practice in ESG reporting. The report’s intention is to help companies gain a clear understanding of what ESG information investors would like to see provided by companies.
Corporate reporting, corporate governance and systemic risk are increasingly being considered together and were the subject recently of a panel event in London.
LSEG, as a leading international markets infrastructure provider connected to issuers, sell side and investors sees itself as ideally placed to help promote good practice across the industry. The guidance builds on market standards such as the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures report and the UN Sustainable Development Goals.
FTSE Russell celebrated the 15th anniversary of its flagship ESG Index Series in December 2016 and there are now over 15 indexes in the global FTSE4Good series.
|Posted on May 17, 2017 at 1:30 PM|
It is extraordinary how UK boardrooms repeatedly manage to pass off cybersecurity as some sort of natural disaster that is outside their remit of accountability.
A timely message lands from Brussels making just this point - repeatedly explored by me in posts on Forbes - but in a different way.
The WannaCry globally-coordinated ransomware attack on 12 May 2017 should put the spotlight on the need for a change in organisations’ thinking about Cybersecurity as it can only be addressed at Board level, says BDO Global, the business advisory firm.
Executive boards need to immerse themselves in the cyber issue and allocate sufficient resources to identify and ensure the effective management of cyber risks: a Board’s accountability includes the way organisations protect, detect, respond and recover, it adds.
"Boards have to lift their organisations to the appropriate level of cyber resilience: this means going above and beyond employee behavioural change programmes and IT departments’ technical measures.
Last Friday’s attack originated in poorly protected workstations, showing that training employees is necessary but no longer sufficient. Cyber threats are more potent than most executive Boards recognise. Companies do invest in security technology - but discover all too soon that the technology is being persistently undermined by different attack methods" says BDO.
Instead, it argues, boardrooms need to move from 'protect' to 'defend' in their thinking about cyber security.
“Ransomware presents a growing threat to every industry, but healthcare organisations are particularly vulnerable. Their digital transformation came late, and the simple reality is that many IT systems weren’t installed with cybersecurity in mind. Because many hospitals rely on end-of-life technology and may prioritise immediate data access over data security, cybercriminals have found their systems relatively easy to penetrate. Hospitals also don’t have the luxury of time: a ransomware infection that blocks access to critical medical data endangers patients’ health. In a scenario where patients’ lives are at stake, the only feasible option, paying the ransom or not, is an extremely tough dilemma” says Shahryar Shaghaghi (USA), Head of International BDO Cybersecurity:
“In a secure environment, executive Boards allocate resources and provide management with the tools to identify cyber risks and apply appropriate mitigation. Cyber-responsible Boards do not just check policy but also oversee and verify the implementation of cybersecurity measures to ensure their effectiveness” says Ophir Zilbiger, Partner at BDO Israel’s Cybersecurity Centre.
I like the phrase 'cyber-responsible boards' - let's hope we hear more of it. It's a lot better than having ostriches in the boardroom.
The link is to a 2014 post on Forbes but hey - three years is a very long time in a fast-changing world. Isn't it time boardrooms caught up ? And then there's the matter of exiting CEOs being paid huge amounts of money despite the cybersecurity breaches on their watch....
|Posted on May 17, 2017 at 11:20 AM|
Oops. That's a bit of a governance FAIL.
More than 50% of UK domiciled funds do not have any independent directors. For funds domiciled overseas, the proportion with no independent directors drops to 20%, according to a survey conducted by LCP, the consultancy.
In the survey of nearly 300 investment funds used by UK pension schemes, LCP found that despite the UK’s leading reputation for fund governance, the jurisdiction lags behind when it comes to safeguarding the interests of pension scheme and individual investors.
It points out that while offshore fund centres are often regarded as the ‘wild west’ of investment funds, in fact they score higher than the UK for fund governance best practice.
Graphic: LCP Fund Governance Survey report May 17, 2017 London
Matt Gibson, partner at LCP, wants to see greater independence of fund boards to limit the scope for conflict of interest and to ensure fund boards act in the best interests of investors.
Matt Gibson, Partner LCP
“Perhaps counter-intuitively, the UK scores worse than overseas jurisdictions for independence. Historically, we feel there has been a degree of reputational complacency on the part of the UK. Funds should look at appointing a higher proportion of independent directors and undertake fee comparison exercises to ensure value for money from all service providers” says Mr Gibson.
There's that question of 'conflict of interest' issue again here. Directors responsible for investment funds are often affiliated to the investment manager and this can cause conflicts that disadvantage investors.
LCP notes that the FCA’s asset management market review has helped to shine a welcome light on the need for changes to greater align the legal structure, board composition and regulation of a fund with the fund’s responsibilities to act in the interests of investors.
But it argues that, following on from that, the UK should now be proactive to ensure the industry is being served as best it can be, including looking to adopt measures similar to those applicable in Ireland and Luxembourg (Europe’s largest fund domiciles). Appointing individual directors, rather than a corporate director, is one such approach, it says.
In particular, it points out that there is a marked lack of independent oversight of Open Ended Investment Companies in the UK, where two-thirds of fund boards had no independent directors.
“Rather than resting on its laurels and basking in the jurisdiction’s reputation, the UK should now look at measures to facilitate and encourage independence on fund boards,” says Mr Gibson.
“Even in the absence of legislative reform, investors in UK domiciled funds should challenge funds and the affiliated investment managers on these grounds to raise standards across the industry” he adds.
The findings from the survey can be downloaded here.
Last month LCP produced another useful report, showing that investment companies are not passing on the benefits of market growth and subsequent economies of scale to investors in the form of lower charges.
"Pension funds are paying asset managers up to 70% more than six years ago, highlighting concerns that investors are losing out due to a severe lack of price competition within the investment management industry" wrote the Financial Times in its coverage of it.
|Posted on May 15, 2017 at 11:55 AM|
Tell me again that the world is not changing in its attitude to climate risk. Investors have their ears to the ground and even the most reluctant to hear appear to be listening and willing to put pressure on business regarding the need for better corporate reporting on an issue that is increasingly being identified as a 'systemic risk.'
As we looked forward to another weekend and prayed for no 'news' to disrupt it, a climate risk shareholder proposal passed at a major US oil and gas company - for the first time. What's more, it was supported by BlackRock - another first.
On Friday May 12th, a proposal led by a group of investors asking Occidental Petroleum to conduct an assessment of the long-term impacts of climate change on its business went to a vote for a second time and passed with strong support from investors.
The investors included the California Public Employees’ Retirement System. CalPERS and Wespath Investment Management and were suported by the US-based Nathan Cummings Foundation - a national grantmaking organization that has made $425 million in grants over the past 25 years focusing on finding solutions to the climate crisis and growing inequality -
“Today’s historic vote puts the oil and gas industry on notice – the climate is changing and so are investor expectations of how companies should respond. Occidental Petroleum’s Board must respond to shareholders’ show of support for increased information on the company’s prospects in a carbon-constrained world. We look forward to the company’s response and will work with our partner, Wespath Investment Management, to make sure this issue stays on their radar screen” said Laura Campos, Nathan Cummings Foundation Director of Corporate and Political Accountability, at the time.
Last year BlackRock, a major Occidental investor, opposed a similar resolution, which failed get a majority of support from investors.
BlackRock explained the switch in a statement saying that despite talks with Occidental it remained concerned "about the lack of discernable improvements to the company's reporting practices" on climate issues.
The resolution received more than 50% of the votes at Occidental’s shareholder meeting in Houston on Friday, according to spokesmen for the company and Calpers.
|Posted on May 10, 2017 at 1:00 PM|
Ah, the theatre of corporate governance: it's the Volkswagen AGM tomorrow.
Hermes EOS, the stewardship and engagement team of Hermes Investment Management, recommends voting against the discharge of the management and supervisory boards of Volkswagen, as well as its revised remuneration policy.
"Our recommendation to vote against the discharge of the management and supervisory boards rests on Volkswagen’s unsatisfactory progress in uncovering the corporate governance and culture problems which contributed to the emissions scandal. We think that Volkswagen has failed to systematically address those problems to date. We also oppose the revised remuneration policy. While there have been some long overdue improvements to the policy, it still lacks sufficiently challenging performance metrics for the bonus component and, in our view, may provide an inappropriate level of pay for mediocre company performance" says Dr Hans-Christoph Hirt, Head of Hermes EOS the stewardship and engagement team of
That seems nice and clear. I have written repeatedly about VW on Forbes, with the first post in March 2016 here (now with 7,482 hits) 'Volkswagen: When 'Hubris' Leads To A Corporate Governance Disaster - And Shareholder Pain'.
Plus ca change ?
At tomorrow’s AGM, Hermes will call for three actions to be taken by the company immediately:
1. Call for publication of key findings of the external investigation
"Following the breaking of the diesel emissions scandal (henceforth “scandal” in September 2015, Volkswagen’s supervisory board commissioned the US law firm Jones Day to conduct an external investigation into the scandal. Volkswagen’s initial intention was to inform shareholders about the findings of the external investigation at the AGM 2016. However, no report summarising the main findings has been published to date and, according to the company, such a report will also not be provided to the public in the future.
In a statement by the supervisory board in October 2015, it promised that it would “do what is required of [the supervisory board] to make sure that the necessary consequences are drawn from the investigation.” Despite the publication of the Statement of Facts by the US Department of Justice (DoJ), we think that there is still no clarity about the underlying reasons for the scandal, the role and liability of the management and supervisory boards and, significantly, how the company intends to address the fundamental corporate governance and culture problems which have contributed to the unfolding of the scandal.
We believe that in order for the company to draw the necessary conclusions from the scandal, to overcome it and move on, the publication of the key findings of the external investigation should be mandatory" it says.
2. Call for independent review of corporate culture
"We remain underwhelmed by the progress Volkswagen has made on reviewing and improving its corporate culture since the emergence of the scandal in September 2015. This is concerning as we believe that a questionable corporate culture contributed to its unfolding. The Statement of Facts by the DoJ supports our view. It identified six “senior employees below the level of the [Volkswagen] management board” who were involved in deceiving customers and regulators about the emission levels of some of the company’s cars. Moreover, soon after the breaking of the scandal, Volkswagen admitted there was “a mindset in some areas of the company that tolerated breaches of rules” and that “deficiencies in processes have favoured misconduct on the part of individuals.”
We recognise that Volkswagen has started to improve its integrity and compliance systems. However, we believe that the efforts to date seem to lack an analytical basis, are insufficiently focused on corporate culture as widely defined, and remain vague on key performance indicators. In our view, the company should therefore undertake a systematic, independent review and analysis of what went wrong and the role corporate culture played in the scandal. Such a review should take a similar form to the so-called “Salz Review” that Barclays Plc commissioned in 2013 as an independent review to uncover weaknesses in the behaviour of employees and the culture of the bank following the Libor-rigging scandal. Based on this type of analysis and related recommendations, a comprehensive remedial plan with relevant actions and measurable objectives should be launched" it says.
Love the use of 'underwhelmed.' It's a nice juxtaposition to 'hubris.'
3. Call for an independent board evaluation
"We remain concerned about the composition and effectiveness of the company’s supervisory board and executive remuneration. For over a decade, we have raised concerns about the composition of Volkswagen’s supervisory board, its effectiveness, and its lack of independence. The supervisory board oversees, and is ultimately responsible for, Volkswagen’s governance and culture in which the emissions scandal was able to unfold and remain undetected for many years."
Ah yes, board evaluation: it remains an underutilised resource.
"Encouragingly, the chair of the supervisory board, Hans-Dieter Pötsch, has improved the supervisory board’s investor communication since he took office in October 2015. Over the last 18 months, we have witnessed the supervisory board starting to listen to investors’ concerns and beginning to take the feedback on board.
However, we believe that there remains significant headroom for improving the company’s governance. In particular, we question whether the supervisory board has adequate board and strategy-relevant experience and skills. In addition, we doubt whether the number of truly independent board members is sufficient. To further tackle these investor concerns, we urge the company to conduct and report on an externally-facilitated supervisory board evaluation to identify experience and skills gaps and assess the need for more independent expertise."
And then there's executive pay.
Hermes EOS recommends voting against the revised remuneration policy because of the following reasons:
"1. The underlying performance criteria and metrics for the bonus component of the pay package are, in our view, not sufficiently challenging.
2. The underlying performance criteria for the long-term incentive (LTI) plan is earnings per share which does not set optimal incentives for the creation of long-term value in the interest of all stakeholders. In our view it should be underpinned by Volkswagen’s long-term, strategic goals which it specified in its Together 2025 strategy. Moreover, according to the company, the LTI is settled in cash after a three-year performance period. We suggest that the LTI should be settled in shares going forward, in combination with specified holding periods which go beyond the tenure of the executives in order to strengthen the alignment of interests between them and shareholders."
Get your corporate governance theatre seats now.
On the same day as this AGM, there is one at Barclays. A recent post on Forbes about that, icymi.
As for me, with great timing I will be at an event in London about corporate governance and systemic risk. I am moderating a panel.
|Posted on May 9, 2017 at 9:00 PM|
A new rule forcing Britain's listed businesses to give shareholders a second vote if a significant majority reject the company's pay report is called for today by the Institute of Directors.
Under the IoD’s proposals, if 30% of investors oppose the remuneration report at the annual meeting, the company would have to look again at its pay policy and give shareholders another vote. Despite a series of high profile rebellions in recent months, executive pay is normally waved through at AGMs, with only 3% of FTSE 100 companies suffering a majority vote against executive pay in 2016.
“UK company boards have been put under unprecedented scrutiny in recent months, with the Government and the House of Commons business committee suggesting reforms to executive pay and the governance of private companies. Business has been facing a crisis of public confidence since the financial crisis, and the political impetus to intervene will not disappear, whoever is elected" said Oliver Parry, Head of Corporate Governance.
“UK corporate governance is highly regarded across the world, but there is still a pressing need to rebuild public trust in big business to work in the long-term interests of investors and employees, rather than the short-term interests of managers. Now is the time for sensible reforms which increase transparency and draw more engagement from shareholders” he added.
The IOD sets out its thoughts in the second of a series of business manifesto papers laying out the challenges that will face the victor after the UK's June’s election.
Its paper is part of the organisation’s 'Let’s Push Things Forward' series which sets out a range of policies to strengthen the UK economy after the general election. It also calls on the next government to develop a code of practice for large unlisted companies and to place more emphasis on director training.
The IoD’s paper, which is part of the organisation’s Let’s Push Things Forward series, setting out a range of policies to strengthen the UK economy after the general election, also calls on the next government to develop a code of practice for large unlisted companies and place more emphasis on director training.
Oliver Parry, Head of Corporate Governance at the Institute of Directors, said:
View full Reforming Corporate Governance paper here
|Posted on May 9, 2017 at 12:00 PM|
So The Guardian dating website 'Soulmates' is the latest to admit to a data breach. Unsurprisingly, it doesn't amount to much of a story in The Guardian.
As reported yesterday on Forbes, Barclays Bank UK has launched a national digital safety drive, having done research that reveals that a quarter of people in the UK (25%) have experienced a cyber-fraud or scam in the past three years. But there's this strange business reluctance to take ownership of data breaches - and an ongoing and worrying lack of transparency.
I was sent some thoughts from DQM GRC - a business formed in 1996 that specialises in data governance, risk mitigation, compliance (GRC) advisory services, benchmarking research and technologies to 'de-risk data assets'. As they are clear, concise and make good sense to me I am going to reproduce them here, rather than trying to paraphrase them and take the credit.
So, here is their development director, Peter Galdies:
"The Guardian is a brand usually synonymous with good practice on data governance – their consent guidance and transparency is often picked out as an exemplar of good practice – and yet they are in the news after appearing to have suffered a data breach.
In this instance, it appears that the Guardian Soulmates website suffered some form of vulnerability that allowed users’ details to be compromised, resulting in users receiving unwanted sexually explicit spam emails.
The Guardian newspaper's publisher, which runs the service, said "human error" was at fault - but then continued to blame a third-party technology provider for the problem, which has now been rectified. (my emphasis)
This issue clearly highlights three key points:
1) It can happen to you – if an organisation as well managed and compliance aware as the Guardian can get hit - anyone can. (my emphasis)
2) Breaches often occur via third parties. In this case a technology partner appears to have been to blame. While vulnerabilities can often “creep in” to development, a strong and robust vulnerability assessment programme including penetration testing and patch management should minimise this risk. Such third parties may hold some legal responsibilities as processors under the new General Data Protection Regulation laws - hopefully adding to the impetus for more robust protection of personal information. Organisations need to take steps to assure themselves that their third party processors and suppliers can provide well governed and secure management of the personal information entrusted to them. (my emphasis)
3) The final point concerns the amount of time this has taken to become public – with some users having notified the Guardian over 6 months ago. (my emphasis) Under the new legislation organisations will have to notify the ICO within 72 hours of having become “aware” of such a breach and the affected users as soon as reasonably possible. This doesn’t appear to have been the case in this instance and may well prove to be an issue for many organisations. A well formed breach management process should help organisations be ready for such unfavourable circumstances."
He knows far more about data breaches than I do, and the 'supply chain' point about third parties is obviously a valid one. I am also not sure when the new legislation kicks in.
But I knoiw that it has become all too apparent that the reason boardrooms of FTSE 350 businesses don't do more regarding data and cybersecurity is because they have no idea how to deal with this issue - as I covered here on Forbes last month.
Is it that good old-fashioned British (and, dare I say it - often male ?) unwillingness to admit they do not know.? Is it time to make it a requirement of the Corporate Governance Code for a digital quotient to measure best practice in corporate governance for listed businesses - as I suggested on Forbes almost two years ago ?
At least then we would require more transparency, and aim for more protection for stakeholders - instead of treating cybersecurity as a bad smell hoping it will just dissipate of its own accord.
|Posted on May 8, 2017 at 10:10 AM|
Firms owned by women and minorities manage only 1.1% of total assets under management, according to a new study of diversity in the $71.4 trillion dollar asset management industry. But it says that firms with diverse ownership are under-utilised by instiutional investors.
The study, which says it is the most in-depth to date on ownership diversity within the asset management industry, is accompanied by an initial analysis which found no statistically significant difference in the performance of these diverse-owned asset management firms and their peers.
Commissioned by the John S. and James L. Knight Foundation and led by Josh Lerner, chair of the Entrepreneurial Management Unit and the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and the Bella Research Group, the study examined four segments of the industry. It grew out of Knight’s efforts to diversify its endowment investments.
Knight has deliberately moved $472 million of its endowment – or 22% – to management by women- and minority-owned firms in the past decade, with no compromise on performance, it said.
Looking at mutual funds, hedge funds, private equity funds and real estate funds for this study, it found that the number of women- and minority-owned firms ranged from 3% to 9%, and assets under management ranged from below 1% to 5%.
“This study, and our experience, confirm that there is no legitimate reason not to invest with diverse asset managers in the 21st century,” said Alberto Ibargüen, president of Knight Foundation.
“Diverse-owned firms are underutilized by institutional investors,” said Juan Martinez, Knight Foundation CFO. “We made a conscious decision to change our approach—and we urge our colleagues to do the same.” (my emphasis)
The study noted that more complete data on diversity in the asset management industry would help effect change.
“In an industry that thrives on data, we need more and better information on diverse ownership,” said Professor Lerner, managing partner and co-founder of Bella Research. “But the more we learn, the clearer it is that there are vast and hard-to-justify disparities in asset management.”
Professor Josh Lerner, Harvard Business School
|Posted on May 3, 2017 at 11:45 AM|
If you are going to stand out, it is best not to do so for all the wrong reasons.
Britian is proud, with good reason, of being a world leader when it comes to standards of corporate governance in business. At the moment the country is in the middle of a review of corporate governance reform which has been inspired by very real events in some of our publicly listed businesses - and in the face of new challenges. Theresa May, the Prime Minister, has championed the importance of corporate governance and building a 'fairer Britain.'
Now, as both a general election and Brexit loom on the horizon, a report just out (and also covered on Forbes) by the NIESR for the TUC points to a fundamental flaw in that vision. The UK stands out - for all the wrong reasons - in the Europe that it is choosing to leave.
Insecure work has proliferated across Europe but is especially marked in the UK, says the report. Its author, Nathan Hudson-Sharp writes:
"Our report shows that, while an increase in insecure forms of work can be identified in most European countries, the UK stands out for two main reasons. The first of these relate to the type of insecure work: while many European countries have seen an increase in more ‘traditional’ forms of insecure work, such as fixed-term contracts and low-hours part-time work, the growth of insecure work in the UK has concentrated in the most atypical and precarious working arrangements. This includes bogus self-employment, temporary agency working and zero-hour contacts.
The second reason the UK stands out is for its weak worker protections. Within the European landscape the UK historically stands out as a highly deregulated labour market, with comparatively low levels of employment protection for both regular and temporary workers. This, coupled with a lack of much needed new legislation, has meant that an increasing number of insecure workers in the UK find themselves at the periphery, or indeed outside, European standards of labour market regulation and social protection. Insecure workers in the UK are therefore more regularly deprived of stability and consistent earnings compared to the rest of Europe, as well as lacking crucial rights such as holiday pay, sick pay, and protections against unfair dismissal through labour market regulations and collective agreements." (my emphasis)
I have covered the corporate governance scandals of the years since the financial crisis and the growing challenges for business including those of diversity and digital transformation, both here and, since late 2013 on my Leadership page on Forbes.
In that time there has been growing debate at the highest levels in both public and private sectors around what constitutes best practice in corporate governance, and how to achieve it. It has gone from being seen as an anorak's pursuit to being identified as the essence, the life blood of any business: what makes it tick, and how it reflects company purpose in both the long, and the short, term.
Over the last six or seven years in particular, we have talked about regulation, about ethics, about behaviour, about accountabilty for senior managers, and there have been changes made in standards and in the regulatory regime for listed businesses.
But it took all that time to come to grips with the need to focus on the importance of company culture, partly I think because there was an assumption that, being made up of human features, it was somehow "nebulous" and difficult to talk about. It is not - it's about the choices we make and the fundamental values we embrace while creating business plans, and setting reasonable, long-term profit targets.
Of course, at a time of rapid change on multiple fronts: technological, political, economic, environmental, demographic....there is always a tendency to dismiss the human factor as somehow less able to be quanitfied. Yet we keep on saying that a business "is only as good as its people."
Important protections for workers - in a bid to create better company culture - were introduced by our regulators. But it remains to be seen how seriously they are taken. For that, see my piece on Barclays, and the great 'corporate governance cop-out.'
If worker's rights are not the fundamental building blocks for best practice in corporate governance, then I do not know what is - only I think it would be pretty near impossible to build a "fairer society" without them.
We have gone from talking about corporate governance as a fluffy subject to linking it to systemic risk - for more on that, see an event coming up soon with Frank Bold and its Purpose of Corporation initiative and Cass Business School (and I am moderating one of two panels.)
|Posted on April 28, 2017 at 1:40 PM|
Corporate culture, M&A and sustainability are all in the spotlight at today's Bayer AGM.
Hermes Investment Management is drawing attention to its "wide-ranging sustainability-related concenrs about the pending acquisition by Bayer, the German life science company, of Monsanto, the US agricultural company best-known for genetic modification."
"Mergers can often have a negative impact on the overall value of a company, with the process complicated further should they have different corporate cultures, like that of Bayer and Monsanto" says Dr Hans-Christoph Hirt, Head of Hermes EOS,
"Bayer’s ambition to become a ‘global leader in agriculture’ comes with great responsibility. The combined entity would control a significant share of both the agrochemicals market and the global seeds market. This is against the backdrop of rapid and extensive consolidation across the agribusiness industry.
The acquisition of Monsanto is likely to increase Bayer’s product-related and reputational risks; perhaps most notably through their increased exposure to Monsanto’s Genetically Modified seeds. Other sustainability concerns include the implications for food security, the livelihood of smallholder farmers and biodiversity." says Hermes in an engagement note.
Therefore, it argues, investors will need to hold Bayer to its ‘deep commitment to innovation and sustainable agriculture practices’.
It also points out that the combination of increased product risk and lobbying power will demand that Bayer increase its level of transparency.
"It is our view that enhanced disclosure of lobbying activities, inclusive of how the company engages with regulators and what issues it engages on would be well received" says Dr Hirt.
This merger has wider implications in the context of German law and corporate governance, it suggests.
"Against the backdrop of the empirical evidence, the transformative nature of the pending acquisition raises once again the question whether, and in what circumstances, shareholders should have the right to vote on major transactions in Germany.
Under German corporate law, the responsibility for approving such transactions generally rests with the supervisory board. While transactions can be presented to shareholders for approval voluntarily, companies are reluctant to do so due to the risks of legal challenges to resolutions passed at shareholder meetings. "A vote on the Monsanto deal under the current legal framework could create significant uncertainty and risks" says Hermes.
"Therefore, it is critical for investors to ensure an optimal composition of the supervisory board. Moreover, investors in the German market need to pay closer heed to capital authorisations. Bayer was able to take the deal forward because of investor support in the past. In light of this, we have tightened our German Corporate Governance Principles. We are not supportive of capital issuance authorisations, which allow management to issue more than 20% of the outstanding share capital with pre-emption rights, unless the company provides a compelling rationale" says Hermes.
Its experience in other markets, most notably the UK, "suggests that there is value in requiring companies to seek approval from shareholders for major transactions. This requirement forces management to make the case for a major transaction to investors and other stakeholders and as such introduces a useful discipline not least with regard to any premium paid for an acquisition. "
Hermes says it would "welcome a review of the relevant German laws and regulation in this regard."