Active ownership and corporate governance as means to safeguarding financial wealth

Published in La Lettre de l'AFGE  n° 21 (May-June 2009)

Norges Bank Investment Management (NBIM) is responsible for the management of the Norwegian Government Pension Fund - Global (previously the Government Petroleum Fund). The portfolio was valued at NOK 2275 billion (Euro 234 billion) at the end of 2008, and is invested in international fixed income and equity markets. Of the equity holdings in close to 7900 companies across the world 174 are French. The equity exposure to the French market was around NOK 88 billion (Euro 9 billion).

Goal

The goal of NBIM’s equity ownership activities is to safeguard financial wealth for future generations by promoting value-creating companies, good corporate governance and sustainable markets. Good corporate governance underpins the development of profitable business and ethical reflection, and at the same time secures shareholder rights and the equitable distribution of benefits. As a sizeable, long-term investor we believe we have the ability and responsibility to influence companies and markets to the financial benefit of the portfolios we manage.

 NBIM’s governance principles are based on internationally accepted global standards, such as the OECD’s Principles of Corporate Governance and Guidelines for Multinational Enterprises, and UN’s Global Compact.

Proxy voting

Voting is our main tool for influencing the board of directors elected to manage the company on shareholders’ behalf. In 2008 we voted on 68 478 proposals in 8800 shareholder meetings. Our goal is to vote on all shareholder meetings of all companies in our portfolio. In 2008 we achieved 88.8% of this target. Unfriendly shareholder practices like share blocking; complex custodian chain, and some companies’ refusal of votes explain why we have not been able to vote on 100% of our holdings.

Specific situations may call for unique responses and we will always take market and company conditions into consideration. Both our corporate governance principles and voting guidelines can be downloaded at our web site www.nbim.no, but in summary our voting guidelines are as follows:

• Information –  We can support an item only if the information is deemed sufficient and timely.
•  Right to vote –  We hold “one share – one vote” as a general principle.
• Unbundling – All proposals should be presented in separate agenda items.
• Proxy access – Shareholders should be able to propose binding resolutions and call a general meeting.
• Board of directors – We expect a majority of the board members to be independent from management, major shareholders, and business parties; fully independent board key committees (i.e. compensation, nominating and audit); different persons as CEO and Chairman; and annual election of all board members.
• Anti- takeover mechanisms –  Poison pills, unlimited capital authorizations, staggered boards, super voting shares, super majority vote requirements and golden shares all serve to enhance the power of management at the expense of shareholders. We vote against unless they are structured to give shareholders the ultimate decision in any take over offer.
• Capital structure – Shareholders should have the right to approve the issuance of shares for corporate purposes in order to ensure that such actions serve a valid purpose. We will support the board’s proposals on capitalisation provided the measure balances corporate needs for flexibility against reasonable shareholder control and equitable treatment of shareholders.
• Executive compensation – We assess the performance objectives established by compensation committees, and support well-designed compensation plans that can be effective in aligning management with shareholder interest.
• Social and environmental issues - We support shareholder proposals on social and environmental issues when we see such non-financial considerations influencing the long-term value and sustainability of the fund. We support shareholder resolutions seeking reasonable disclosure of the social and environmental impact of a company’s policies, operations or products. Companies should respect human rights and ensure that internationally accepted norms regarding work place standards apply to their operations.
• Political contributions - We support proposals on reporting of political contributions when the current disclosure is considered insufficient and such disclosure will benefit shareholders.
• Workplace policies - Companies should have policies in place that prevent all forms of workplace discrimination.
• Climate change - We will support proposals that request the company to report on their release of climate change relevant gases and mitigation strategies connected to these when the current disclosure considered insufficient and such disclosure will benefit shareholders. We will only consider supporting proposals that request the company to enhance or further develop already existing business strategies, where these are deemed to benefit shareholders.

NBIM’s assessment of French corporate governance?

We acknowledge the improved AFEP / MEDEF corporate governance code, and we are looking forward to seeing how French companies will implement it. Still we have identified some issues in French companies that are not according to our governance principles, and that we think has not been sufficiently addressed by the AFEP / MEDEF code. We consider them to be fundamental for sound corporate governance.

Board independence- split CEO/chairman

The principle of board independence is fundamental. The French corporate governance code allows for and more than a third of the biggest French companies (CAC40) still have one person assuming both positions as Chairman and CEO. This in addition to lack of independence in the board and in key board committees in some companies are key issues for improvement in French corporate governance.

We believe our interest as minority shareholders will be better safeguarded with increased independence and accountability of the board. The composition of the board should be such that it represents all shareholders towards whom they are accountable. The board should be in a position to make independent evaluations and decisions, and have the support to take a long term view in the development of business strategies. We hold as a principle, and believe in its value enhancing power, that there should be a clear division of the executive responsibilities of the CEO and the supervisory role of the Chairman. This is important to ensure a balance of power and authority and improve accountability. The CEO should report to the Board of Director and the Board of Directors should report to the shareholders. Clear separations of these roles can improve check and balances and control of risk, strategy and policies.

Some of the major companies have showed the way by splitting the two functions. Therefore we are disappointed to see recent French counter examples to the international trend of separating the positions of CEO and Chairman.

Restrictions on voting rights

The French corporate governance code allows for, and approximately 25% of the biggest French companies (CAC40) have restrictions on, voting rights, either by voting caps or by double voting rights.

We believe voting power should be directly proportional to economic interest. Listed companies today have international operations and an international investor base, and national investors should not be privileged. In fact approximately two thirds of the operations of CAC40 companies is conducted outside France and 45% of their capital is held by foreign investors. In theory French double voting rights apply to all shareholders, but in practice only a few registered shareholders benefit from it. Most investors held bearer shares through custodians, making access to double voting rights impossible even if they are long term shareholders.

We believe in a simple share structure where voting rights are directly proportional to capital interest. Use of voting restrictions can be misused as anti take-over measures, and all such measures should be abandoned. Voting restrictions will also effectively transfer power from some shareholders to others or from shareholders to management. Equal and the only just treatment of all shareholders would be assured by effectively applying one share one vote.

Shareholder proposals

Shareholder influence in France is also limited through the companies’ possibility to refuse shareholder proposals based on legal technicalities. Without going deep into legal details, we recognize the need for a standalone or cumulated holding threshold of 0.5% of capital to be able to make a shareholder proposal, but the process of putting the proposal forward need to be simplified to improve dialog between shareholders and companies.

We encourage all investors and companies to pursue these issues and others to improve corporate governance, board accountability and shareholder influence in France. You can consult our web site for more detail on our views on these issues.

We will intensify the implementation of our policy through communicating our concerns, engaging with companies, voting against election or re-election of any CEO to the Board of Directors, and exercising shareholder rights including voting and proposing shareholder resolutions.