APG, one of the world’s largest institutional investors, has released a corporate governance policy in which it makes clear that the boards of companies must take sustainability, shareholder and stakeholder interests into account when making decisions.
The fund manager’s head of sustainability and governance, Claudia Kruse (pictured), says the corporate governance and voting policy attempts to “internationalise” the standards of governance APG expects from approximately 4000 companies it invests in around the world.
“This policy is much more international in its outlook than before and takes as its starting point the guidelines from the ICGN [International Corporate Governance Network], OECD guidelines and the ten principles of the UN global compact,” Kruse says.
“Our expectations are framed so they are applicable internationally.
“Previously, we had a much more Dutch frame of reference for the voting policy.”
Kruse says the policy was also informed by collaborative work APG undertakes as a member of numerous international networks, including the UN-backed PRI, as well as the experience of its internal portfolio managers, who manage approximately 80 per cent of APG’s assets.
“We have very close connections with our portfolio managers, who for example often have a clear view on how companies should be appropriately incentivised, and it has produced very interesting discussions about how an alignment of interests between management and shareholders can be achieved,” Kruse says.
“And also, how an alignment between strategy and incentives can be achieved.”
The new voting policy seeks to link non-financial environmental, social and governance (ESG) factors to the remuneration policies of companies, where relevant.
APG expects boards to consider whether it is appropriate to include these ESG factors in its remuneration policy because they can have an impact on the long-term value of the company.
It also supports clawback provisions on remuneration packages.
“Compared to the past, we make much stronger references to our expectations around sustainability targets within the remuneration strategy, for example,” Kruse says.
“We have been much more explicit about our expectation that there be some form of board responsibility for sustainability, and while we are not prescriptive about what that should look like we do think it should be addressed.”
Kruse says that all the criteria that form part of a company’s remuneration policy must be measurable, relevant to the company, and transparent.
“If we have serious concerns about the sustainability performance of a company we may use our voting rights, and our ability to vote on routine items on the agenda, to express such dissatisfaction,” she says.
“That could be on such things as that we don’t support a report on accounts, or the re-election of a director.”
The fund manager does not support linking targets, and therefore incentives, to rankings in sustainability indexes.
Kruse says that APG has seen in the Netherlands a move by many companies to link incentives to ESG targets, but it is important to have a model that is consistent with good management principles generally.
“These targets should meet the tests that financial targets should meet, namely, that they are relevant, challenging and precise, and that management can actually affect the achievement of the targets,” she says.
“In our view, sustainability indices bring together too many aspects when determining a ranking, and don’t single out the specific performance aspects most relevant to a company.
“That is why we don’t think a ranking in a sustainability index should be the basis for paying out bonuses.”
Kruse says APG has most commonly used its proxy voting rights to vote against items involving remuneration, director elections and share issuances.
APG says in its corporate governance framework that remuneration for directors and senior executives “must be in line with general remuneration policy for all employees of the company”.
Particularly in emerging markets, APG has been concerned about the size of share issuances, and the conditions of discounts that are applied with or without pre-emptive rights, says Kruse.
APG also sets out its litigation policies clearly, where it pursues companies that it alleges have contravened securities laws, causing losses to its investors.
Under these policies the fund may seek corporate governance reforms as part of legal settlements.
Where possible APG exercises its voting rights in all of the companies it invests in.
It has a “focus list” of several hundred companies where it is involved in more active analysis and dialogue, which could include talking with the company directly, and working with portfolio managers and collaboratively with other investors.
Kruse says APG last year carried out “in-depth engagement” with 183 companies on ESG issues, on top of a lot of low-intensity engagement.
As part of its governance policies, APG also engages with regulators to improve the transparency and workings of the markets it invests in.
Kruse says that APG is very active in Asia and has seen good results from a region typically regarded as still developing corporate governance practices.
This has included engagement with Korean electronics manufacturer Samsung on health and safety concerns.
“We are very active in Asia and other emerging markets, and have a dedicated sustainability and governance professional in our Hong Kong office. We also involve our emerging markets team based in Hong Kong and in Amsterdam,” Kruse says.
“On the one hand there is far less information available, but on the other hand, once investors do speak up, companies often do listen a bit more because they are not used to hearing from investors.”