Category: Paper

November 27, 2015

The Global Network of Director Institutes (GNDI), founded in 2012, brings together member-based director associations from around the world with the aim of furthering good corporate governance. Together, the member institutes comprising the GNDI represent more than 100,000 directors from a wide range of organisations. This paper describes the global perspective of GNDI on best practices to consider when renewing the board through changes to its composition.

As a collective of the pre-eminent governance associations around the world, GNDI plays an important role in providing leadership on governance issues for directors of all organisations to achieve a positive impact for companies, the economy and society. The following perspectives have been developed as part of a commitment to this goal and to guide boards in good governance beyond legislative mandates.

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View full perspectives paper.

Date: May 2014
Type: Perspectives Paper

Background: The problem of excessive short-termism

What is excessive short-termism?
Decisions–including those of a business, investment or financial nature–are often made with a particular timeframe in mind.
Similarly, the outcomes of decisions may be assessed having regard to a pre-determined timeframe (whether implicit or explicit). The identification of a
timeframe for expected outcomes is often important because decisions made with a view to achieving certain long-term outcomes may have negative short-term consequences, and vice versa. For example, an investment decision by a company that has a relatively long payoff period may not have an immediate positive impact on the company’s market value, and may actually have a negative short-term impact.

Excessive short-termism has been variously described as “concentration on short-term projects or objectives for immediate profit at the expense of
long-term security”,  “the focus of investors and managers on short-term returns at the expense of those over the longer-term”,  and “corporate and
investment decision making based on short-term earnings expectations versus long-term value creation for all stakeholders”.

For the purpose of this perspectives paper:
1. “short-term” is defined as a time horizon of approximately three years or less, bearing in mind
that the meaning of “short-term” will vary across industries; and
2. “excessive short-termism” is defined as a focus on short-term objectives that disregards (whether intentionally or otherwise) the potential
adverse effect of those objectives on long-term value creation. It manifests in actions (e.g behaviours and decisions), as well as inaction.

Having short-term objectives is not, of itself, detrimental to company value.  Effective company strategies will generally have short, medium and long-term  elements. In some circumstances, a focus on short-term risks, results or opportunities will be beneficial, particularly in a time of rapid change or
crisis. There is also the view that the “long term is nothing but a “series of short terms” put back to back” ; that is, companies that perform
consistently well over the short-term may have a better chance of succeeding in the long term.

It is also important to note that the timeframe contemplated by the decision-maker will not necessarily be indicative of the quality of the
decision. Decisions made with a view to the long-term may not be “good decisions” and, similarly, short-term decisions may not be “bad decisions”.
Accordingly, it is important that companies manage short, medium and long-term horizons across all their decision-making, and strike a balance between these timeframes.

Some causes of short-termism are extraneous to the corporation. These include arms-length shareholding on public equity markets rather than relationship-based financing, absence of concentrated shareholdings in individual companies, a substantial rise in financial intermediaries over the last decade, and the growth of high-frequency traders and exchange-traded funds, both of which put pressure on corporations to produce short-term results.

It is submitted that there is currently an imbalance in decision-making by the leadership of major publicly traded companies, among others, in favour of
short-term perspectives and objectives due to pressure from some investors as well as short-term remuneration drivers for executives, and that a greater
emphasis on longer-term considerations is now required to achieve a sustainable balance.

Consequences of excessive short-termism

Excessive short-termism in investment and, in turn, corporate decision-making, may have significant consequences for the longer-term value and
sustainability of individual companies. Ultimately, it may lead to reduced shareholder value and returns over the longer-term, for example as a result
of:
• missed opportunities to create enduring value for the company and therefore its shareholders. Companies excessively focused on short-term
performance measures may fail to adequately consider and develop growth opportunities; 
• under-investment in value-creating opportunities such as research and development. A 2006 survey of over 400 financial executives in the US found that 80% would decrease discretionary spending on such areas as research and development and advertising in order to meet a short-term earnings
target, while 55% would delay starting a new project;  and
• the rejection of long-term projects, or projects with high build or sunk costs, including infrastructure and high-tech projects.  The same 2006 US survey
found that 59% of executives would reject a positive net present value project if it would mean missing short-term earnings targets.

Excessive short-termism also has important consequences for public companies from a risk management perspective. For example, rewarding executives for short-term results can incentivise them to take excessive risks.  Further, excessive short-termism may affect the corporate governance practices of listed companies. As the turnover of shareholdings increases, it becomes more difficult for companies to know and understand their shareholders.  It may also undermine the traditional role of shareholders in monitoring companies because short-term shareholders are generally less concerned about stewardship, and less likely to engage with boards and management.

It is also a public policy issue. Potential consequences of excessive short-termism on the economy and broader society include:
• a reduction in the capacity for innovation and competitive advantages of businesses in global markets. This downside was recently highlighted in a book by U.S. economist Michael Porter of Harvard University (see U.S. section of this paper);
• the misalignment of share prices from value fundamentals leading to an inefficient allocation of capital. Undervaluation caused by focus
on only short-term financial indicators, such as quarterly earnings, or stemming from manipulative trading behaviours such as short-selling can prevent companies with potential for sustained long-term growth from receiving adequate financing;
• the potential for institutional corruption. Monetary payoffs based on short-term performance measures may lead to weaker accountability for long-term
consequences and create incentives for executives to “game society’s rules for immediate gain”; 
• increased equity market volatility and uncertainty. This unpredictable “delta” factor may, in turn, further discourage long-term
investors and amplify the problem;
• investors increasingly moving to private markets – so-called “dark pools” – which allow participants to transact without displaying quotes publicly. Dark pools were originally created as venues for institutional investors to trade directly among themselves without high-frequency trading interference, and help to guard against short-term spikes in the price of a security. However, high-frequency traders are now also active inside most of the dark pools; and
• the distraction of companies from environmental and corporate social responsibility issues. Additionally, projects with a high potential for broad social impact, and which could help facilitate long-term economic growth, may be less likely to receive funding.

If excessive short-termism is left unchecked, there is some risk that it could lead to a reduction in the value of share markets over the long-term.
Furthermore, excessive short-termism and its consequences could exacerbate systemic risk. It has been argued, for example, that the Global Financial Crisis was exacerbated by excessive short-term thinking.

GNDI Recommendations

Boards should consider developing and disclosing a clear framework for managing long-term value creation and curbing excessive short-termism. Set out
below are some suggested practices, which extend beyond minimum regulatory requirements, that boards of listed companies could adopt to help foster
longer-term value creation. Importantly, long-term corporate success is likely to require that the board be committed to working with management, influencing management to focus on long-term value creation, and providing support if management face short-term pressures. It is also important to bear in mind that what is appropriate for one company will not necessarily be appropriate for another.

A long-term outlook and culture
1. Set long-term and forward-looking strategic goals, business strategies and implementation plans, and monitor performance with long-term considerations in mind.
2. Invest in activities that contribute to long-term value, such as research and development.
3. Be guided by the company’s core values and purposes to help balance short, medium and long-term priorities.
4. Build and reinforce a corporate culture that contributes to long-term value creation.
5. Reject actions that produce only short-term benefits if such actions are at the expense of the longer-term interests of the company.
6. Select directors for the board who have longer-term strategic perspectives.
7. Designate a director or committee of directors to focus on long-term issues and to be the advocate for the long-term
financial health of the company.

Engagement, communication and reporting practices
1. Effectively communicate the company’s long-term goals, strategies and achievements to
investors, fund managers and analysts.
2. Encourage reporting practices that disclose short-term performance in the context of medium and long-term
goals and strategies.
3. Supplement or replace short-term earnings guidance (such as quarterly earnings guidance) with more meaningful disclosures (for example, narratives that combine long-term strategy narratives, health metrics and integrated reporting).
4. Promote clear and transparent communications.
5. Educate the market to understand the benefits of longer-term thinking and the drivers of long-term company value.
6. Make stewardship and engagement a more attractive activity for investors.

Executive remuneration and rewards
1. Base a meaningful proportion of executive remuneration on long-term performance measures, avoiding excessive weighting of short-term remuneration.
2. Include qualitative criteria when evaluating the performance of executives.

Key Global Efforts, Developments and Resources to Curb Excessive Short-termism

Australia
The Australian Institute of Company Directors published a thought-leadership paper, “Curbing excessive short-termism: A guide for boards of public companies” in April 2013 . The paper examines the issue of “short-termism” and the impact it has on corporations, as well as offering several potential solutions for Australian boards wishing to shift planning and strategy on to a longer-term footing.

The Corporations and Markets Advisory Committee (CAMAC) that was established by the Australian Government has observed that, from a legal perspective, Australian directors are not confined to short-term considerations in their decision-making.  The interests of a company can include its continued long-term well-being, though a director who acts in the short-term interests of members will not have breached his or her legal duties. CAMAC further observed that it is ultimately “a matter for companies themselves and the commercial judgment of directors how to balance or prioritise shorter and longer-term considerations”.  Boards can seek to protect long-term shareholder value by focusing on longer-term goals, strategies and actions. It may be appropriate for boards to reject actions that produce only short-term financial results if such actions are at the expense of the longer-term interests of the corporation and its shareholders.

Brazil
The Brazilian corporate law states that directors and officers must act “to achieve the corporation corporate purposes and to support its best interests,
including the requirements of the public at large and of the social role of the corporation.” 

The Brazilian Institute of Corporate Governance’s Code states that the mission of the board of directors is to protect and value the organization, optimize the return on investment in the long term. It also recommends that the board’s compensation structures should be different from those for the management (officers), given the distinctive nature of these two bodies and that compensation based on short-term results should be avoided to the board.

In its publication “Sustainability Guide for Companies: an Overview for Directors and Senior Executives”, the Brazilian Institute of Corporate Governance noted that “[t]he board of directors should support and back up management in the process of attaining long-term goals and in reducing negative externalities, taking care that management does not hasten short-term actions that could generate negative externalities in the medium and long term. 

Canada
The Supreme Court of Canada held in its 2008 BCE decision that the directors’ fiduciary duty is to act in the best interests of the corporation. It held that
“[t]he fiduciary duty of the directors is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an
ongoing concern, it looks to the long-term interests of the corporation. The context of this duty varies with the situation at hand.”

The Canada Pension Plan Investment Board and McKinsey & Company launched a joint initiative, entitled “Focusing Capital on the Long Term” at the
Institute of Corporate Directors annual conference in Toronto in May 2013, calling on business leaders to focus their thinking and actions on long-term
value creation .

Europe (see also United Kingdom)
European economists have struggled with the issue of short-termism for generations. Classical economic theory favored a long-term approach but British
economist John Maynard Keynes famously observed that “in the long run we are all dead,” arguing in favor of a more expedient time frame for meeting needs. The Austrian economist Hayek criticized Keynes for that. Their 20th century debate has framed the dialogue in Europe and beyond during this century.

The European Commission held a public consultation to explore the challenges and opportunities related to long-term financing in the context of efforts to ensure smart, sustainable and inclusive growth in the European Union. The summary of responses can be found at: http://ec.europa.eu/internal_market/consultations/2013/long-term-financing/docs/summary-of-responses_en.pdf

The European Commission is due to issue a Communication later this year on long-term financing with a forward-looking approach, which will include a
company law package (a new shareholders’ rights directive and a recommendation on the comply or explain approach).

Malaysia
While the Malaysian Code on Corporate Governance 2012 (MCCG) does not specifically use the term “short-termism”, it does recommend that the Board should ensure that the company’s strategies promote sustainability.  In discharging its fiduciary and leadership functions, it is incumbent on the Board to review and adopt a strategic plan for the company that includes its short-term performance against the backdrop of its long-term sustainability.

Recognizing that there can often be a perception held by shareholders that a company’s short-term objectives may not be well aligned with its long-term
strategies and business sustainability, the MCCG also recommends that the Board should promote effective communication and proactive engagements with shareholders by overseeing the development and implementation of a shareholders communications policy.

New Zealand 
Issues of short-termism are particularly relevant to an economy underpinned by heavy reliance on production in the primary sector. It is no coincidence that public discourse on short-termism in New Zealand has a strong correlation to sustainable long-term economic development, appropriate economic models for primary production and investment in research and development. However, little formal or longitudinal research specific to the New Zealand context appears available.

The Institute of Directors in New Zealand publication “The Four Pillars of Governance Best Practice” outlines the importance of balancing short and
long-term incentives and outlooks in executive remuneration. Short-termism is also relevant to managing organisational development and growth including the relationship to corporate social responsibility, succession planning, risk management and incentive schemes.

Well-framed incentive schemes are identified as playing a part in producing benefits in the long-term interest of a company and its shareholders. Benefits
to this approach include:
• increased company efficiencies and cost controls;
• the development of an entrepreneurial and innovative attitude among employees; and
• encouraging management to function as a team in working towards the realisation of the company’s overall objectives.

The Institute of Directors in New Zealand’s “New Zealand Director Competency Framework” identifies the following attributes and competencies that are
relevant to director skills in mitigating short termism:
• “[the director] responds to and influences constructively, future focussed strategic chance management within an organisation”; and
• “[the director] aligns actions and behaviours in the boardroom to the organisations vision direction and values”. Other initiatives to combat short-termism in New Zealand include the Sustainable Business Council of New Zealand’s “Vision 2050”, which is aimed at ensuring that economic incentives and economic value are based on improvements to long-term strategic drivers rather than short term historical performance. An interesting contrast to risks relating to short-termism in New Zealand is identified in the governance approach to Maori (indigenous) economic development.  A feature of the New Zealand economy is a growing Maori-owned and controlled asset base consequent on the resolution of long standing grievances with the Crown. Research in the area is nascent but iwi (tribal) governance appears to be characterised by multi-generational ownership and long term (sometimes 50 to 100 year) strategic and planning timeframes. This “horizon planning” impacts on how entities engage with stakeholders and service providers.

South Africa
The King Report on Governance for South Africa 2009 (King III) that was released in 2009 encourages companies to take a long-term perspective and
emphasizes the integration of social, environmental and economic issues, stating that boards should not make decisions based only on the needs of the
present as to do so may compromise the ability of future generations to meet their own needs. Instead, the board should ensure that it has appropriate
long-term objectives that will result in sustainable outcomes. This approach recognises that a business cannot operate in an economically viable manner over a prolonged period without due regard being had for long-term sustainability issues. The board should therefore consider sustainability as a business opportunity, where long-term sustainability is linked to creating business opportunities.

It is accepted in South Africa that boards should not take a short-term view on strategy and business impact and that shareholders should align their
expectations with this view. For this reason, South Africa has published “The Code for Responsible Investing in South Africa” (CRISA), which is applicable to institutional investors.  The CRISA speaks of the effects of the Global Financial Crisis, which left most pension schemes underfunded and government debts in developed markets at unsustainable levels, to socio-economic challenges and climate change which threatens our own existence as human society. As long-term investors and fiduciaries, the CRISA notes that institutional investors have the responsibility to ensure that investment is made in a way that promotes long-term sustainability. This view is reflected in the preamble to Regulation 28 issued by the Minister of Finance under section 36 of the Pension Funds Act, 1956 which now states that prudent investing “should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character”.

One of the key themes addressed in the CRISA is the avoidance of excessive short-termism and it stipulates that an institutional investor should develop a policy on how it incorporates sustainability considerations, including ESG, into its investment analysis and activities. The matters to be dealt with in the policy should include, but not necessarily be limited to, an assessment of the quality of the company’s integrated reporting dealing with the long-term sustainability of the company’s strategy and operations. If integrated reporting has not been applied, due enquiry should be made on the reasons for this.

Thailand
According to the criteria of ASEAN CG Scorecard and Thai CG Assessment, it is recommended that companies disclose their remuneration policy/practices for its executive directors and CEO, which should include how short-term and long-term incentives and performance measures are used to encourage long-term decision making and sustainable company performance.

The United Kingdom
The most important recent UK development relating to the short-termism debate was the publication of the Kay Review of UK Equity Markets and Long-term Decision Making in July 2012. This government-commissioned report concluded that short-termism was indeed a problem for companies with a listing on UK equity markets. The problem was principally caused by a displacement of earlier trust relationships between companies and shareholders by the advent, over the last 20 years, of a more speculative investor culture based on transactions and trading.

In an effort to counter short-termism pressures, Professor Kay made a number of policy recommendations in the report:
• Improve the incentives and quality of engagement between companies and investors by establishing an Investor Forum to foster more effective collective engagement by institutional investors. This proposal has been supported by the UK Government, and its potential implementation is currently being explored by leading UK institutional investors.
• Restore relationships of trust and confidence by applying fiduciary standards more widely within the investment chain. This idea has led the UK Law Commission to initiate an investigation into the fiduciary duties of pension fund trustees and their long-term stewardship responsibilities, which is
due to report in 2014.
• Change the culture of market participants by the adoption of ‘good practice statements’ by company directors, asset managers and asset holders. These statements are intended to promote a more expansive form of stewardship and long-term decision making, and have been endorsed by the
UK Government. Such statements complement the UK Stewardship Code for institutional investors which was published in 2010 (and revised in 2012), and which defines long-term ownership responsibilities for institutional shareholders. A significant proportion of UK fund managers and asset owners have
signed up to the Code, which is voluntary in nature and is implemented according to the “comply or explain” principle.
• Realign incentives by better relating directors’ remuneration to long-term sustainable business performance and better align asset managers’
remuneration to the interests of their clients. The UK Government has sought to encourage such pay practices by advocating the deferment and potential claw back of variable pay in the UK Corporate Governance Code, the Financial Conduct Authority’s Remuneration Code for banks, building societies and some investment firms, and by introducing a binding shareholder vote on executive pay policy, which came into force in 2013.

Another of Professor Kay’s recommendations was to abolish any obligatory requirement amongst listed companies for quarterly financial reporting. This proposal has won the support the UK Government, although relevant legislation in this area falls under EU law. However, on the basis of UK government support, agreement has now been reached at EU level on amendments to the Transparency Directive which will remove the requirement to publish interim management statements or quarterly reports.

Finally, in October 2013, the UK Government implemented legislation to restructure the annual report in a way that will help companies, through their
narrative or non-financial reporting, to bring the strategic messages that are valued by long-term shareholders and investors to the fore in company
reports.

The United States
The National Association of Corporate Directors (NACD) also offers constant guidance to help directors ensure long-term sustainable value of enterprises
they oversee. Notably, NACD Blue Ribbon reports on topics including performance metrics, executive compensation, and risk oversight which make the case for a longer-term perspective and practices.

One of the first US observers to call prominent attention to the problem was Michael Jacobs in his classic work “Short-Term America” . Since then, a number of scholars have taken up this cause, most recently and notably Harvard University’s Michael Porter noted in his recent new book “Competitiveness at a Crossroads” , Porter defines a nation’s competitiveness as the extent to which companies operating in the country are able to compete successfully in the global economy while supporting high and rising living standards for their average citizens. Applied to the U.S., Porter notes that some steps that reduce firms’ short-term costs, then, actually work against the true competitiveness of the United States. Short-termism then, in Porter’s view, is no less than a national economic issue—and ultimately a global one, as nations are economically interdependent.    

On January 14, 2010, the US Securities and Exchange Commission (SEC) published a concept release on “Equity Market Structure” which related to a wide range of market structure issues, including high frequency trading, order routing, market data linkages, and hidden, or “dark” liquidity. It noted that
“unlike long-term investors, professional traders generally seek to establish and liquidate positions in a shorter time frame. Professional traders with these short time frames often have different interests than investors concerned about the long-term prospects of a company”.

Key Research Findings and Commentary

There have been many studies on short-termism. It is beyond the scope of this paper to review all of them.  However, the following studies may be of
interest:
• UK Department for Business Innovation & Skills, ‘A Long-term Focus for Corporate Britain: A Call for Evidence’ (Department for Business Innovation
& Skills, October 2010) www.bis.gov.uk/assets/biscore/business-law/docs/l/10-1225-long-term-focus-corporate-britain.pdf

• Krehmeyer, Dean, Matthew Orsagh and Kurt N Schacht, ‘Breaking the Short-Term Cycle: Discussion and Recommendations on How Corporate Leaders, Asset Managers, Investors, and Analysts Can Refocus on Long-Term Value’ (CFA Centre for Financial Market Integrity & Business Roundtable Institute for Corporate Ethics, 2006) 1 www.cfapubs.org/doi/pdf/10.2469/ccb.v2006.n1.4194.

• Bebchuk, Lucian A and Jesse M Fried, ‘Paying for Long-term Performance’ (Discussion Paper No 658, Harvard Law School, 2010)

• Haldane, Andrew and Richard Davies, ‘The Short Long’ (Speech delivered at the 29th Société Universitaire Européenne de Recherches Financières Colloquium, Brussels, 11 May 2011)  www.bis.org/review/r110511e.pdf

• Salter, Malcolm S, ‘How Short-Termism Invites Corruption …And What to Do About It’ (Working Paper No 12-094, Harvard Business School, 12 April
2012) www.hbs.edu/research/pdf/12-094.pdf

• Arnold, Mark and Orthman, Jason, “The economic costs of excessive short-termism” (Hyperion Asset Management, August 2011)

• Brandes Institute, ‘Death, Taxes and Short-term Under-performance’ (Brandes Investment Partners, 2007)  www.brandes.com/Institute/Documents/BI_DeathTaxesandShortTermUnderperformance0907_US.pdf

• Trades Union Congress, ‘Investment Chains: Addressing Corporate and Investor Short Termism’ (21 December 2005) 
www.tuac.org/en/public/e-docs/00/00/01/F5/telecharger.phtml?cle_doc_attach=566

• Orsagh, Matthew, ‘Visionary Board Leadership: Stewardship for the Long Term’ (CFA Institute, June 2012) 30 www.cfapubs.org/doi/pdf/10.2469/ccb.v2012.n3.1

• Committee for Economic Development, ‘Corporate Governance Practices
to Restore Trust, Focus on Long-Term Performance, and Rebuild Leadership’ (2009)
www.ced.issuelab.org/research/listing/corporate_governance_practices_to_restore_trust_focus_on_long_term_performance_and_rebuilding_leadership

• Asker, John, Joan Farre-Mensa and Alexander Ljungqvist, ‘Corporate Investment and Stockmarket Listing: A Puzzle’ (ECGI, April 2013).

• ‘The Kay Review of UK Equity Markets and Long-term Decision Making: Final Report’
(July 2012) http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917-kay-review-of-equity-markets-final-report.pdf

 

Date:  19 December 2013

Type: Perspectives Paper

Background on Board-Shareholder Communications[i]

As a matter of law, boards are required to act in the best interests of the company as a whole. It follows then that directors should take the interests of all relevant stakeholders into consideration when making board decisions. A focus limited to shareholders may not serve any constituency well, not even shareholders themselves considered as a whole.  At the same time, however, board engagement with the company’s shareholder body (both institutional and retail) forms a key part of how boards determine what is in the company’s best interest.Therefore, director institutes around the world favour regular, direct communications between directors and shareholders. 

Board-shareholder communications in the modern public company are rooted in the board’s responsibility to ensure sustainable corporate performance through transparency. In many global corporations today, ownership is broadly dispersed.  This widening separation of ownership and control means that, more so than ever, board-shareholder communications are both an imperative and a challenge. This perspective paper offers observations on what boards and shareholders can do respectively to improve their communications. 

GNDI Recommendations for Boards and Shareholders 

Companies and their boards should have the flexibility to engage with investors and analysts in ways that serve their mutual goals in building long-term corporate value. Boards should be encouraged to be innovative in how they engage with investors, even though their primary responsibility remains to oversee the communications handled by management on behalf of the company. Boards and investors can take certain steps to improve communications between them, and this paper offers suggestions intended to inspire improvements on both sides of the dialogue between corporate
fiduciaries and shareholders.

It is the view of the GNDI that board-shareholder communications should not be mandated through adoption of new legislation or regulation (except in those jurisdictions where current legislation or regulation prevents such communications) —voluntary action is the key. In those countries where
there are laws or regulation that prevent this communication, it may be necessary to change existing legislation to allow dialogue between the board and
the shareholders.   

What Boards Can Do

Boards play an important role in bridging the actions of the company to the interests of shareholders.  Although directors must always exercise their judgment to represent the interests of the company as a whole, not merely its current shareowners, the board still needs to engage in shareholder communications, and can do so in a number of different ways. 

Primarily, board-shareholder communications will occur through board oversight of important company and board disclosures to shareholders,including but not limited to prospectuses for securities offerings and periodic financial statements such as the annual report. Although these focus predominantly on financial information, there is a growing trend to report on nonfinancial issues, drawing guidance from organizations such as the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC).[ii]  Good governance also requires the board to be closely involved in disclosures made by the company regarding the board itself. In this way directors have the opportunity to educate shareholders on the importance of their work as representatives of all shareowners and thestandards of governance that they uphold. 

Directors can also make use of the notice of the annual general meeting or proxy statement as an importantvehicle for shareholder communication. Shareholders need to be provided with sufficient information in relation to proposed proxy resolutions—whether proposed by the company or a shareholder—so that they are able to make informed decisions on how they vote on those resolutions at the general meeting.  

Another important aspect beyond these outgoing communications is the board’s receipt of and response to incoming communications from
shareholders, typically addressed to the board leader (chairman, presiding director, lead director, or equivalent) or committee leaders. Increasingly, shareholders want their letters to go directly to members of the board, rather than being screened by management. To be proactive, boards can provide contact information for the board member/s who should receive certain types of communications, while at the same time identifying issues that would more appropriately be addressed to management.  

Regular dialogue between significant investors and the company’s leaders should also be encouraged, not only around the annual general meeting, but also throughout the course of the year. Directors can work with management to identify the respective duties of management and the board with respect to regular communications with certain investors, for example long-term, major institutional shareholders. 

Furthermore, boards can remain open and responsive to requests for face-to-face meetings with shareholders, both in the lead up to the annual general meeting (to discuss and to clarify proposed resolutions to be voted on at the meeting) andthroughout the year. This is particularly the case with large institutional shareholders. To be sure, there are various national regulatory barriers to such meetings (notably Regulation FD in the United States, prohibiting selective disclosure of material non-public information to shareholders and French laws restricting to the CEO the power to commit the company). Nonetheless, these meetings are increasingly important for effective relations between those who govern companies and those who own them.  While in most circumstances it will be more appropriate for shareholders to meet with a member of management, there are likely to be occasions where it will be most effective for a particular member of the board (for example the board chairman or the chair of a particular board committee) to engage directly with shareholders, depending on the issue being discussed. In any case, such communication must follow the positions defined
collectively by the board, taking into account, among other things, the views of management. 

In a company with a concentrated ownership, the key role of the board with respect to shareholders is to heed the interests of all of them—not just the dominant one/s —as issues pertaining to equal treatment and selective disclosure may arise. For example, shareholders with representatives on the board do enjoy access to more information, but they are still bound by the fiduciary duty of directors to all
shareholders. Boards of such companies will need to ensure that shareholder communications reach all shareholder groups, using the same means of communication, but with appropriate attention to specific needs of each shareholder group. 

Member organizations of the GNDI support effective board-shareholder communications in all of the above respects, and agree that such communications are more likely to succeed when shareholder voting occurs in an informed and transparent manner, as recommended in the next
section of this paper.

What Shareholders Can Do 

Effective board-shareholder communications cannot depend on the board alone. Shareholders, too, have a responsibility to communicate effectively with
the company. Shareholders can fulfil their role as owners of the company’s shares and monitor the value of their assets by taking a regular interest in the life of the company and its strategy. 

In some cases, an individual shareholder may wish to engage with the company (or board) independently or, alternatively, in concert with other
shareholders (where such concerted engagement by shareholders is permitted[iii]). In the view of the GNDI, it is beneficial for both the company and shareholders for shareholders to be able to pool resources through collective engagement, especially at times when the company is facing difficult times (subject however to applicable laws relating to ‘acting in concert’, and to disclosure of their policy on collective engagement[iv]) as this can allow for more effective and efficient engagement. 

With respect to shareholders that are institutional investors, they may look to the U.K. Stewardship Code of the Financial Reporting Council in
the United Kingdom as a model.[v]  Another model is the ICGN Code of Institutional Investor Responsibilities published by the International
Corporate Governance Network. [vi] These codes address the need for investor transparency, a value fully supported by the GNDI. 

As stated in recent commentary by one of our GNDI member organizations[vii], effective board-shareholder communication could be enhanced by
institutional investors disclosing, amongst other things:

• the full text of the investor’s voting policy/guidelines;     
• whether or not the investor engages the services of proxy advisors;[viii]
• to what extent the investor conducts its own analysis of resolutions before voting; and
• to what extent the investor follows/diverges from the recommendations of proxy advisors.[ix]
• Such increased disclosure would help the beneficial owners of the shares held by institutional investors to understand how investment and voting decisions are made on their behalf. Beneficial owners would then be able to make investment decisions on the basis of whether they want to invest in a fund that brings an independent mind to bear on voting decisions or, alternatively, in a fund that effectively outsources this function to proxy advisors.

Key Board-Shareholder Communications Developments and Resources

GNDI recommends that directors continue to engage in dialogue with their shareholders as appropriate, and to monitor issues specific to their own countries, as listed below.

Australia

The Australian Institute of Company Directors (AICD) has noted growing concerns in Australia amongst some directors that the recommendations on ‘how to vote’ made by proxy advisory firms have gone beyond mere ‘influence’. Many AICD members believe that the decision-making function for how an institutional shareholder will vote is effectively being outsourced by the institutional shareholder to the proxy advisory firm. In response, these concerns were outlined in the research report of the AICD titled ‘Institutional Share Voting and Engagement’, which was released on 12 October 2011. 

The following year, the Australian Government requested that the Corporations and Markets Advisory Committee (CAMAC) consider a number of issues concerning annual general meetings and how shareholders engage with companies in Australia. CAMAC then released a discussion paper, ‘The
AGM and Shareholder Engagement’, in September 2012. In this paper, CAMAC invited submissions in relation to, (amongst other issues):         

• The role of institutional shareholders throughout the year, including the period leading up to the annual general meeting. In particular, whether there is a problem with having a peak annual general meeting season and, if so, how might  this be resolved; and whether at least some institutional investors should be required or encouraged to report on the nature and level of their engagement with the companies in which they invest (for example in a similar manner as provided for in the UK Stewardship Code, referenced above); and
• The role of the proxy advisor, including standards for investors using proxy advisors, including the extent to which these investors should be entitled to rely on the advice of proxy advisors in making voting decisions or, alternatively, whether those investors should have some obligation to bring an independent mind to bear on these matters; and standards for proxy advisors themselves

The AICD’s submission in response to this discussion paper (see Appendix
A) noted that the AICD:   

• Does not support changes being made to the timing of the annual general meeting season;
• However, some of the problems caused by the peak annual general meeting season could be alleviated through early engagement between companies and institutional shareholders outside the peak season. This could be encouraged
  through non-binding guidance on engagement practices;
• Supports the introduction of principles and guidance to promote reporting by institutional shareholders on the nature and level of their engagement with the companies in which they invest; and
• Supports the introduction of ‘good practice’ principles and guidance for proxy advisors.

Submissions closed in December 2012. CAMAC has stated that it will periodically update the information in the discussion paper until its report is
published.[x]

Brazil

The Instituto Brasileiro de Governanca Corporativa (IBGC), the Brazilian Institute of Corporate Governance, has addressed board-shareholder communications through its Code of Best Practice. According to this Code, ‘The Board is the link between the shareholders and the rest of the organization, and must oversee the organization’s relationship with its other stakeholders. In this context, the Chairman should establish a
dedicated channel of contact with the shareholders, not restricted to General Meeting or Partner Meeting situations. The Board must account for its
activities to the shareholders, to allow them a full understanding and assessment of the Board’s actions.  The main vehicles in this communication
are the Annual Report, the organization’s website, the Proxy Statement, and the General Meeting.  A direct contact between Directors and shareholders is also allowed, and even desirable, provided secrecy and fairness rules in treating information are observed’.[xi]

IBGC’s recommendations support voluntary action rather than mandates. In Brazil there is no specific legal provision on board communication with shareholders. Communication should be primarily held by the investor relations officer (IRO) but with no restriction to board members. The
applicable rules require considering fair treatment to all shareholders in providing information as well as avoiding the disclosure of insider non-public
information. 

Canada

The Institute of Corporate Directors (ICD) has had significant engagement with the topic of board-shareholder communications in recent years.
The focus of the ICD’s 2013 annual conference was shareholder activism.  This is possible in part because Canada enjoys a healthy framework for dialogue among institutional investors and directors, as promoted by a variety of organizations.

From the investor side of the table, the Canadian Coalition for Good Governance (CCGG), whose members comprise Canada’s leading institutional
investors, have developed a protocol for shareholder engagement with directors. The protocol puts CCGG in the role of a representative for the concerns of its membership.  To fulfill that role, CCGG will typically schedule a meeting with the board chair and/or relevant committee chair to discuss governance and executive compensation related issues. CCGG will then generally prepare a summary report of the meeting for review and comment by the company’s board prior to circulation to CCGG’s members. The CCGG’s co-ordinated approach to shareholder-director communication is efficient and results in a healthy dialogue among institutional investors and the board. As can be seen from the Model Policy (see Appendix B), to avoid concerns about selective disclosure the discussions focus on governance and disclosure matters in the public domain.

Meanwhile, the Canadian Securities Administrators (CSA) is currently developing policy guidance on the role of proxy advisory firms in Canada. In its submission to the CSA, the ICD recommended that proxy advisory firms be required to:

• Expressly disclose their conflicts on any matter in respect of which they are issuing a voting recommendation;  
• Set up ‘walls’ and adopt other structural solutions to eliminate bias in the advice they provide;
• Refrain from issuing a voting recommendation on a particular matter where they have provided consulting services to the issuer, or their investor client or owner has a material interest;
• Where the proxy advisory firm intends to issue a contrary voting recommendation to discuss this with the issuer and share its report with the issuer before its completion to ensure fairness and accuracy and enable the advisory firm to present a more fully considered view; 
• If the outcome of this process is still an intended contrary recommendation, to provide the issuer with sufficient time and opportunity, if it wishes to do so, to include a response in the materials that are ultimately provided to the proxy advisory firm’s clients;
• Consult with issuers and directors in the development of proxy voting guidelines along with other stakeholders and develop guidelines that are not cast in stone. 

The CSA is currently expected to issue its policy guidance on proxy advisory firms for comment in the first quarter of 2014.

Europe (see also United Kingdom and France) [xii]

Within the European Confederation of Directors’ Associations (ecoDA) there is shared concern about board-shareholder communications and a
strong commitment to sharing leading practices on the topic. In 2013,  ecoDA joined with the Institute of Business Ethics to write a Review of the Ethical Aspects of Corporate Governance Regulation and Guidance in the EU. This paper addresses the European Commission’s 2012 Corporate Governance Action plan, which includes among other topics the issue of shareholder and proxy advisor disclosures about their activities.  

The issue of shareholder and proxy advisor transparency has been an important one for Europe.  Within the private sector, the European Fund and Asset Management Association (EFAMA) have developed a ‘Code for External Governance: Principles for the Exercise of Ownership Rights in Investees’ companies’.[xiii] The European Sustainable Investment Forum (Eurosif) has also issued a report on ‘Shareholder stewardship: European
ESG Engagement Practices 2013’.

Proxy advisors have been an important subject in Europe. In 2011, in a green paper on the EU Corporate Governance Framework (May 2011), the
EU contemplated the possibility of an EU ‘law to require proxy advisors to be more transparent, e.g. about their analytical methods, conflicts of interest and their policy for managing them and/or whether they apply a code of conduct’[xiv]. The European Commission stated in its Action Plan that in 2013 it would launch a legislative initiative on the disclosure of voting and engagement policies as well as voting records by institutional investors. As of
late 2013, it appears that having a publicly disclosed policy on engagement may eventually become mandatory in the EU. 

In February 2013, the European Security Markets Authority (ESMA) issued a ‘Final Report: Feedback Statement on the Consultation Regarding the
Role of the Proxy Advisory Industry’ requesting that proxy advisors develop a code of conduct. It stated that ‘there are several areas…where a coordinated effort of the proxy advisory industry would foster greater understanding and assurance among other stakeholders in terms of what they can rightfully expect from proxy advisors’.[xv] Areas covered included identifying, disclosing, and managing conflicts of interest; fostering transparency to ensure the accuracy and reliability of the advice (including disclosing general voting policies and methodologies, considering local market  conditions, and providing information on engagement with issuers. Furthermore, the Drafting Committee of the Best Practice Principles for Governance Research
Providers has launched a public consultation on the draft principles which concern activities associated with the provision of shareholder voting and
analytical services. The Committee – which is independent from ESMA– has drafted the principles following ESMA’s Final Report stating that the proxy advisory industry would benefit from increased disclosure and transparency regarding how it operates. [xvi]  The group has six members — Glass, Lewis & Co, Institutional Shareholder Services, Ivox, Manifest, Pensions and Investment Research Consultants
(Pirc) and Proxinvest — which plan to work on a comply-or-explain basis.

France

In 2005, Institut Français des Administrateurs, the French Institute of Directors, published a paper entitled ‘Proposals for a Better Relationship between Directors and Shareholders’ containing general recommendations for the improvement of corporate governance. More specifically, Autorité des Marchés Financiers (AMF), the financial markets regulator, published in 2011 a Recommendation relating to the proxy advisors, with approximately the same contents as those covered by the ESMA recommendation mentioned above.  In 2012, AMF published the report of a working group on shareholders meetings, a substantial part of which was devoted to the ‘permanent dialogue’ between shareholders and issuers.  AMF requests the companies to discuss their compliance with the report’s recommendations in their annual report.[xvii]

Malaysia

MACD (Malaysian Alliance of Corporate Directors) was an active participant in the Securities Commission-initiated Malaysian Corporate Governance Blueprint 2011 initiative that led to the Malaysian Code on Corporate Governance (MCCG 2012), which urged boards to facilitate the exercise of ownership rights by shareholders and to communicate more effectively with them, stating as follows:

The board should take reasonable steps to encourage shareholder participation at general meetings, which are important avenues through which shareholders can exercise their rights. The board should take active steps to encourage shareholder participation at general meetings such as serving notices for meetings earlier than the minimum notice period, direct the company to disclose all relevant information to shareholders to enable them to exercise their rights, and consider adopting electronic voting to facilitate greater shareholder participation. The board can demonstrate their commitment to shareholders by ensuring that the company publishes these measures on its corporate website.

The board should promote effective communication and proactive engagements with shareholders. Direct engagement with shareholders provides a better appreciation of the company’s objectives, quality of its management and challenges, while also making the company aware of the expectations and concerns of its shareholders. This will assist shareholders in evaluating the company and facilitate the considered use of their votes. Board members
and senior management are encouraged to have constructive engagements with shareholders about performance, corporate governance, and other matters affecting shareholders’ interests.

New Zealand

The Institute of Directors in New Zealand (IoDNZ) has advocated for transparent board-shareholder communications since its founding years. As stated in a recent communication, boards work as a ‘dynamic, high-performing team in pursuit of the goal of improving shareholder value’.[xviii] Clearly board-shareholder communications can help to advance that cause. New Zealand public companies have greater flexibility to communicate with shareholders electronically and conduct virtual shareholder meetings as a result of amendments to the Companies Act of 1993 under the Companies Amendment Act (No 2) 2012, which was effective 31 August 2012.[xix]

South Africa

South Africa’s King Code on Governance issued 2009 (King III) contains practice recommendations to boards and directors on how to execute their legal duties towards the companies that they serve. Subsequently a Code for Responsible Investing by Institutional Investors in South Africa (CRISA), similar to the UK Stewardship Code and the UN Principle for Responsible Investment, was issued in 2011. This investors’ Code provided principles along which the institutional investor should execute investment analysis and investment activities and exercise rights so as to promote sound governance. Interaction between shareholders and companies should take place in accordance with King III and CRISA. As read together, these provide the full framework for board-shareholder interaction that constitutes good governance. 

Specifically, King III recommends that shareholders be afforded the right to cast an advisory vote on the remuneration policy of the company. In light of
the fact that public companies listed on the Johannesburg Stock Exchange are obliged in terms of the listings rules to apply King III or explain if they do
not, this is a practice recommendation that is followed almost without exception by JSE listed companies. To deal with the engagement around this issue a recent position paper by the Remuneration Committee Forum of the Institute of Directors in Southern Africa (IoDSA) includes ‘stakeholder communications’ as a specific obligation during the year.[xx]

As far as CRISA is concerned, it requires that ‘an institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities’. In terms of CRISA this entails having a policy that deals with ‘mechanisms of intervention and engagement with
the company when concerns have been identified and the means of escalation of activities as a shareholder if these concerns cannot be resolved’.

Due to the practical difficulty that is often encountered by investee companies that wish to engage with shareholders, CRISA furthermore provides that ‘non-disclosure of voting records by an institutional investor and its service providers precludes the investee company the opportunity to engage with the institutional investor or its service providers regarding the vote exercised. Therefore an institutional investor and its service providers should, before agreeing to a proxy or other instruction to keep voting records confidential, carefully consider the reasons put forward to justify confidentiality’.[xxi]

As in most jurisdictions companies and shareholders should be wary of giving or receiving price sensitive information or acting on such information in a manner that constitutes insider trading in contravention with relevant legislation.

The Companies Act, 2008 (the Act) provides for the shareholders of public and state-owned companies to elect the members of the audit committee. 
This provision, together with the right of shareholders to elect at least 50% of the directors, has resulted in a need for better communication between the company and shareholders, so that shareholders can exercise an informed vote. 

Furthermore, the Act has expanded the scope of directors’ accountability beyond the shareholders as has traditionally been the case in the
commonwealth. For instance, derivative action is now available to directors, officers, and representatives of employees in addition to shareholders. The King Code is also following a stakeholders-inclusive approach. All of these trends have forced companies to broaden their formal engagement to stakeholders beyond shareholders. 

The United Kingdom

The governance system in the UK encourages ongoing shareholder engagement and dialogue with boards and the Institute of Directors (IoD) works
to facilitate this dialogue in a variety of channels ranging from multi-stakeholder meetings to the issuance of commentary and guidance. 

In the typical U.K. corporation, although the CEO and CFO may be the main communication conduits in terms of strategy and performance, the board
– through the chairman or senior independent director – is a key discussion partner on governance issues. This dialogue should generally aim to be
constructive and non-confrontational, and will only escalate to a public conflict as a last resort. 

A key basis for governance dialogue is how the company is implementing the United Kingdom Corporate Governance Code.  Where provisions are not complied with, the company has a duty to ‘explain’, and this forms the basis for further discussion. With respect to investors, the recently published United Kingdom Stewardship Code outlines expectations of institutional investors in terms of their role as owners of companies. This encourages them to actively engage with their investee companies.  Although many asset managers and asset owners have signed up to this Code, it remains to be seen if it will transform them into genuinely committed stewards of companies rather than simply short-term oriented buyers and sellers of their shares. 

The United States

The National Association of Corporate Directors (NACD) supports and promotes proactive board-shareholder communications. One
of the ten principles listed in NACD’s Key Agreed Principles to Improve Corporate Governance for U.S. Public Companies (developed in accordance with Business Roundtable and various shareholder groups) is Shareholder Communications: ‘Governance structures and practices should be designed to encourage communication’. NACD offers many resources for directors wishing to improve their communications withshareholders, including publications and educational events.[xxii] The Report of the NACD Blue Ribbon Commission on Board-Shareholder Communications offers several key points of advice. (See Appendix C). 

In the United States, where the investor community is diverse in nature and goals, the legal framework provides channels for some investors such as public pension funds and union pension funds to be‘activist’, as measured by prevalence of class action lawsuits against corporate directors and officers and the filing of proposed proxy resolutions—both common experiences for many public company directors in the U.S. These activities typically showcase in the public arena conflicting views between shareholders and boards about key issues. One purpose of improved communications between the board and shareowners is to inspire and encourage dialogue and positive solutions.  

In the U.S., as elsewhere, shareholders often want their letters to go directly to members of the board, rather than being screened by management. To facilitate this desire, the New York Stock Exchange requires that listed companies disclose contact information for the‘presiding director’, defined as the individual who presides over meetings of the independent directors.  In addition, the SEC has a rule that requires public companies to disclose the
means by which shareholders may communicate with the board. 

In recent years, direct communications between boards and shareholders have increased, despite the apparent barriers posed by Regulation FD, a 2000 rule that forbids selective disclosure of material information. At first boards saw Regulation FD as a reason to decline invitations to speak with particular
investors. Over time, however, many boards have overcome Regulation FD-related concerns by including general counsel in discussions to ensure that no nonpublic material information is divulged, and being ready to disclose publicly any such information promptly if needed. Also, boards typically
designate particular directors to represent the board (such as the independent chair or lead director, or a committee chair as appropriate) on appropriate
corporate governance issues. 

Meanwhile, despite this progress, directors in the US are concerned about the role that proxy voting advisors can play in shareholder voting decisions—a subject of scholarly research in recent years.[xxiii]

In addition, the U.S. federal government has been looking into the influence of proxy advisors for several years. Landmark events include a Government Accountability Office report on ‘Corporate Shareholder Meetings: Issues Relating to Firms That Advise Institutional Investors on Proxy Voting’ (June 2007)[xxiv], he Securities and Exchange Commission’s ‘Concept Release on the Proxy System’ (July 2010), and hearings by the House Financial Services Capital Markets Subcommittee (June 2013).[xxv] In October 2013, the general counsel of the Nasdaq Stock Market petitioned the SEC to take action related to proxy advisor disclosure transparency and conflicts of interest.[xxvi] Also, over the past decade, the SEC has held a series of roundtables to discuss shareholder voting and communication issues, most recently in December 2013.[xxvii]

The private sector in the U.S. is mobilizing to address concerns as well—notably the Shareholder Communications Coalition, currently composed of Business Roundtable, the National Investor Relations Institute, and the Society of Corporate Secretaries. This coalition, with a dedicated website at shareholdercoalition.com, has issued several comment letters on emerging issues in proxy voting.

(For more on proxy voting issues in the United States, seeAppendix D).

Global

The Organization of Economic Cooperation and Development (OECD), which has 29 members from around the world, included board-shareholder
communications in its original and updated Principles of Corporate Governance (1999, 2004—see Appendix E) and its more recent guidance on implementing these (2012). 

In addition, the OECD has published a white paper on the ‘Role of Institutional Investors in Promoting Good Governance’. [xxviii] The paper notes in particular that ‘the proposition that shareholders can best look after their own interests subject to having sufficient rights and access to information is basic to the OECD Principles and domestic law in many jurisdictions. Nevertheless, at the time of the last revision of the OECD Principles of Corporate Governance in 2004, the need to deal with the emerging reality of large institutional shareholders was already apparent and led to several new principles being agreed by consensus, especially …covering disclosure of voting policies, managing conflicts of interest and co-operation between investors’.[xxix]

GNDI, ICGN, and the GNIA

At the collective level, directors and shareholders can strive for closer communication through their respective associations. In many countries, the leading director association is in communication with the leading investor association in that country. Globally, directors and shareholders have communicated through the International Corporate Governance Network (ICGN). Recently (June 2013), ICGN announced the creation of a Global Network of Investor Associations modeled after GNDI. Cooperation between GNDI and ICGN will continue, and cooperation with the forthcoming GNIA is
likely and desirable. 

GNDI Conclusion

Director institutes around the world favor regular, direct communications between shareholders and directors, and have published guidance on this topic. GNDI recommends that directors continue to engage in dialogue with their shareholders as appropriate, and to monitor issues specific to their own countries, as listed above.  

Appendix A

Institutional Share Voting and Engagement: Exploring the links between directors, institutional shareholders and proxy advisors –Top-Level Findings from the Australian Institute of Company Directors.

Finding 1: The institutional share voting environment is characterised by high volume decision making in a compressed time, and this has an impact on how institutional shareowners (both managed funds and superannuation funds) conduct share voting – in particular what functions they do themselves, and what functions they outsource.

Finding 2: That institutional share voting is a high volume, compressed time business, shapes how the parties in the institutional share voting process communicate with each other.

Finding 3: Institutional share owners have been increasingly active in voting their shares and are increasingly willing to vote‘against’ company resolutions if it is in their interests to do so – there is also some evidence (from interviews) that superannuation funds are becoming more active in voting and that they are doing more of the voting themselves rather than leaving this function with managed funds.

Finding 4: When directors think of institutional shareowners, they think of managed funds rather than superannuation funds. Although this is changing, directors tend to underestimate the importance of superannuation funds.

Finding 5: Share voting policies of institutions, proxy advisors and industry groups are important influences on institutional share voting.

Finding 6: Proxy advisory firms are an important influence on institutional share voting in Australia.

Finding 7: A significant minority of company directors think proxy advisors are improperly influential. They believe too much has been outsourced by institutional investors, making proxy advisory firms de facto decision makers.

Finding 8: Companies and directors are often not communicating with the real decision makers in institutional investors.

Finding 9: There are basic problems with the share voting process and machinery which lead to ‘lost’ and miscounted votes.

The AICD believes that ‘good practice’ principles and guidance for proxy advisors would be useful. By way of example, such principles and guidance could include:

• Disclosure requirements, including as regards the qualifications and experience of proxy advisors, their voting policy/guidelines, the resources they allocate to analysis of meeting resolutions and outsourcing arrangements; 
• A requirement that sufficient time and resources be allocated to considering the issues involved in voting decisions in order to make appropriate voting recommendations; and
• Where a proxy advisory firm intends to issue a contrary voting recommendation, to discuss this with the company and share its report with the company before its completion to ensure fairness and accuracy and enable the advisory firm to
  present a more fully considered view.[xxx]

Appendix B

Model Policy on Engagement with Shareholders – from the Canadian Coalition for Good Governance 

Policy of the Board of Directors on Engagement with Shareholders on Governance Matters 
 
The board of directors believes that it is important to have regular and constructive engagement directly with its shareholders to allow and encourage
shareholders to express their views on governance matters directly to the board outside of the annual meeting. These discussions are intended to be an
 interchange of views about governance and disclosure matters that are within the public domain and will not include a discussion of undisclosed material
 facts or material changes. 

The board will develop practices to increase engagement with its shareholders as is appropriate for its shareholder base and size. Examples of engagement practices include meeting with the company’s larger shareholders and organizations representing a group of shareholders, as well as creating conduits for communication with smaller shareholders on an ongoing basis. 

The board recognizes that shareholder engagement is an evolving practice in Canada and globally, and will review this policy annually to ensure that it is
effective in achieving its objectives.[xxxi]

Appendix C

NACD Advice on Board-Shareholder Relations   
 
The Report of the NACD Blue Ribbon Commission on Board-Shareholder Communications, from the National Association of Corporate Directors in the United States, offers several key points of advice, including the following: 

• The governance committee should have oversight of board-shareholder communications, making efforts to ensure that they are open, candid, and productive;
• Directors should make a special effort to stay‘communications-ready’ on the topics that are most
  appropriate for board-shareholder communications — including emerging ‘hot
  issues’;
• The board should consider creating a policy statement that reflects the board’s communications with shareholders. The board’s policy statement should clearly state the legal boundaries surrounding communications;
• The board should consider taking the initiative to communicate with shareholders when desirable, and not limit itself to responding to shareholder requests for communications;
• Requests deemed appropriate by the board should be answered directly and promptly by a director—ideally the chair or lead director (or equivalent);
• When the board approves a proposed change in economic control or governance policy (e.g., a major merger, acquisition, or an amendment to its bylaws), it should consider describing the processes it followed in reviewing and approving the change;  
• All directors should prepare to become more active members in the annual meeting. Boards should consider having the chairs of the three key committees answer questions directed to the respective committee at the annual meeting, and by request throughout the rest of the year;
• The subject of board-shareholder communications should be a regular agenda item at governance committee and board meetings, and should therefore appear in the board’s annual work plan;
• In general, boards should accept meeting requests regarding issues that could have a material impact on company performance or stock price. Based on the most recent NACD Public Company Governance Survey, approximately half of  boards surveyed in mid-2013 had a representative of the board meet with institutional investors in the past 12 months. The most common board representative was the chairman; and
• Boards should consider using new and alternative approaches to reach a broader shareholder audience. [xxxii]

Appendix D

Background on Proxy Voting and the Role of Proxy Advisors in the United States 
 
In the United States, one occasion for communications between shareholders and directors is to convey views on potential or proposed resolutions in the proxy statement coming up for a vote—re compensation, governance, director re-election, or other subjects permitted for proxy voting—a list expanding over time to include more issues as shareholders exercise greater influence over corporate governance and policies.[xxxiii]  Sometimes shareholders withdraw a resolution following communications, because the board has explained or changed a policy. When boards and shareholders lack communication, or fail to reach agreement, shareholders take to the proxy, and qualified resolutions go to a vote. More often than not, management will recommend a vote against the shareholder resolution and explain its views. Therefore, proxy votes often are seen as referendums on management and boards, as shareholders choose between competingresolutions from management and from their own ranks.  

In some cases, shareholders do their own analysis of the situation and vote accordingly. However, large institutional investors with widespread holdings cannot analyze the many issues needing a vote (in the thousands for major holders) so they turn to proxy advisors for a number of services, including data aggregation, voting recommendations, and voting platforms. The dominant providers of this service are Institutional Shareholder Services and Glass Lewis, both headquartered in the United States (although Glass Lewis is owned by the Ontario Teachers’ Pension Plan Board). As of mid-2013, ISS claimed more than 1,700 clients, and Glass Lewis more than 900.  

Both ISS and Glass-Lewis have voting guidelines, which they can use as the basis of their recommendations to their clients. In some cases,
however, the advisors implement the voting policies of their clients.  For ISS, the balance of voting is about half ISS-policy-driven and half client-policy-driven.[xxxiv]  Many of their clients’ voting policies closely follow ISS policies. 

Although sometimes proxy advisors recommend voting with management it is also common for them to side with shareholders against management, and when they do, their influence appears to heighten, at least with the votes of mutual funds.[xxxv]

Causality is difficult to prove, but there is both anecdotal and research evidence of a correlation between proxy advisor recommendations and shareholder voting trends.  For example, anecdotally, one director has stated, ‘when institutional investors follow ISS en masse, directors of
public corporations can expect to see 20%, 30%, even 50% of their company’s shares being voted not as the directors recommend, but as ISS recommends.’  Other estimates, factoring in general governance trends that may impact votes, place the correlation at much lower
levels.

For directors who prefer communications to referendums, any correlation is too high. Boards want shareholders to vote for solutions that are the best for the company, and become concerned when shareholder votes are swayed by proxy advisor recommendations—especially if those recommendations are based on misinformation and/or bias, as some have charged.  

In March 2013, the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce has released the following ‘Best Practices and Core Principles for the Development, Dispensation, and Receipt of Proxy Advice’, seeking to improve corporate governance by ensuring that proxy advisory firms:

• Are free of conflicts of interest that could influence vote recommendations;
• Ensure that reports are factually correct and establish a fair and reasonable process for correcting errors;
• Produce vote recommendations and policy standards that are supported by data driven procedures and methodologies that tie recommendations to shareholder value;
• Allow for a robust dialogue between proxy advisory firms and stakeholders when developing policy standards and vote recommendations;
• Provide vote recommendations to reflect the individual condition, status and structure for each company and not employ one-size-fits all voting advice; and
• Provide for communication with public companies to prevent factual errors and better understand the facts surrounding the financial condition and governance of a company.[xxxvi]  

Appendix E

The OECD Principles of Corporate Governance – Summary and Highlights 
 
The main areas of the OECD Principles, in summary[xxxvii],
are:

• Ensuring the basis for an effective corporate governance framework;
• The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities;
• The rights of shareholders and key ownership functions;
• The corporate governance framework should protect and facilitate the exercise of shareholders’ rights;
• The equitable treatment of shareholders;
• The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights;
• The role of stakeholders in corporate governance;
• The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises;
• Disclosure and transparency;
• The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company;
• The responsibilities of the board;
• The corporate governance framework should ensure the strategic guidance of the company, the effective; and
• Monitoring of management by the board, and the board’s accountability to the company and the shareholders.

NOTES

[i] This discussion focuses on companies with widely dispersed ownership. GNDI recognizes that this discussion may not apply to all public companies. In many developing economies, large blockholders typically have significant stakes in major listed companies. This has major implications for the board-shareholder dialogue.  In such companies, the big shareholder can dominate the board and the management, and minority shareholders are left fighting to have their voice heard—much as they may in private companies, where minority shareholder oppression is explicitly prohibited by law or legal precedent. 

[ii]For the GNDI perspective on integrated reporting, visit GNDI.org. 

[iii] For example, in the United States, following significant proxy reforms of 1992, shareholders may communicate with each other in planning a proxy vote. Prior to 1992, such communications were illegal. Recent research suggests that this reform had a beneficial effect on company performance. Vya Cheslav, ‘The Disciplinary Effect of Proxy Contests’, September 9, 2013. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1705707

[iv] See U.K. Stewardship Code, Principle 5: ‘Institutional investors should be willing to act collectively with other investors where appropriate.  At times
collaboration with other investors may be the most effective manner in which to engage. Collective engagement may be the most appropriate at times of
significant corporate or wider economic stress, or when the risks posed threaten to destroy significant value. Institutional investors should disclose their
policy on collective engagement, which should indicate their readiness to work with other investors through formal and informal groups when this is necessary to achieve their objectives and ensure that companies are aware of concerns.The disclosure should also indicate the kinds of circumstances in which the institutional investor would consider participating in collective engagement’. 

[v]The U.K. Stewardship Code. September 2012. http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code-September-2012.pdf

[vi]ICGN Statement of Principles for Institutional Investor Responsibilities (2013) https://www.icgn.org/images/ICGN/files/icgn_main/Publications/best_practice/SHREC/ICGN_Principles_Investor_Responsibilities_Guidance_Sept_2013_print.pdf

[vii] See letter of October 22, 2012, to Mr. Andrew Bragg, Senior Policy Manager, Financial Services Council, from the Australian Institute of Company
Directors. http://www.companydirectors.com.au/Director-Resource-Centre/Policy-on-director-issues/Policy-Submissions/2012/~/media/Resources/Director%20Resource%20Centre/Policy%20on%20director%20issues/2012/FSC%20Standard%20No%2013%20%20Proxy%20Voting%20Policy.ashx

[viii] See, e.g., Financial Services Council, ‘FSC Standard No 13: Proxy Voting Policy’ (Draft Standard No 13, Financial Services Council, 28 August 2012) [6.2(a)(ii)], [8.4], [4(b)]. 

[ix]For example, AMP Capital discloses in AMP Capital, Corporate Governance: 2010 Full Year Report (January 2011) AMP Capital, the extent to which votes lodged by it match those of the proxy advisor. It is reported that a comparison between votes cast by AMP Capital and proxy advice shows: 61 per cent of AMP Capital’s votes matched advisor recommendations, 21 per cent were voted ‘more strongly’ (either abstain or against, rather than ‘for’), 18 per cent were voted ‘more loosely’ (e.g. in favour rather than against, and usually based on further discussions held with companies).
http://www.ampcapital.com.au/AMPCapitalAU/media/contents/Articles/ESG%20and%20Responsible%20Investment/corporate-governance-report-full-year-2010.pdf

[x] See the AICD Research Paper, ‘Institutional Share Voting and Engagement: Exploring the links between directors, institutional shareholders and proxy advisors’.October 2011. http://www.companydirectors.com.au/Director-Resource-Centre/Research-reports/~/media/Resources/Director%20Resource%20Centre/Research/AICD%20%20ISVotingWeb_FINAL.ashx. See also the AICD Submission in response to the Corporations and Markets Advisory Committee’s paper ‘The AGM and Shareholder Engagement’.December 21, 2012
http://www.companydirectors.com.au/Director-Resource-Centre/Policy-on-director-issues/Policy-Submissions/2012/Submission-on-AGM-and-Shareholder-Engagement

[xi] Code of Best Practice of Corporate Governance, Instituto Brasielero de Governanca Corporativa. Sao Paulo, Brasil. 2010. Available at www.ibgc.org. See also http://www.ecgi.org/codes/documents/ibcg_sep2009_en.pdf

[xii] Final Report: Feedback statement on the consultation regarding the role of the proxy advisory industry
http://www.esma.europa.eu/system/files/2013-84.pdf

[xiii]http://www.efama.org/Publications/Public/Corporate_Governance/11-4035%20EFAMA%20ECG_final_6%20April%202011%20v2.pdf.

[xiv] http://ec.europa.eu/internal_market/company/docs/modern/com2011-164_en.pdf

 [xv] Final Report:Feedback  Statement on the Consultation Regarding the Role of the Proxy AdvisoryIndustry February 19, 2013.
http://www.fundspeople.com/system/media/3601/original/informeproxy.pdf?1361298603

 [xvi] The draft Principles can be found on the website of the Committee.http://www.esma.europa.eu/news/Proxy-Advisors-launch-consultation-
best-practice-principles?t=326&o=home. The deadline for submitting responsesto the consultation is 20 December 2013 at 12.00 CET

[xvii] http://www.amf-france.org/en_US/Actualites/Communiques-de-presse/AMF/annee_2012.html?docId=workspace%3A%2F%2FSpacesStore%2F7c56cc0e-bbd8-4910-9d98-fdabc1af4443  

[xviii]  ‘The CEO’s Report: Effective Directors Need to be Good Leaders’. https://www.iod.org.nz/News/TheCEOsreport.aspx
  Accessed December 6, 2013.

[xix]http://www.legislation.govt.nz/act/public/2012/0060/latest/DLM4443901.html

[xx] http://c.ymcdn.com/sites/www.iodsa.co.za/resource/collection/57F28684-0FFA-4C46-9AD9EBE3A3DFB101/Position_Paper_1_A_framework_for_remuneration_committees.pdf

[xxi] ‘CRISA: Code for Responsible Investing in South Africa’, http://www.atlanticam.com/pdf/responsible-investing/crisa.pdf

[xxii] See for example ‘What’s Next in Shareholder Communication?’ http://www.nacdonline.org/resources/WebinarDetail.cfm?ItemNumber=7155

[xxiii] For example, the following related U.S. studies shed important light on key themes in board-shareholder relations: ‘The Board, Social Media, and Regulation FD’, by David Katz, Wachtell Lipton Rosen and Katz, New York Law Journal, March 28, 2013 (discussion of how social media impacts corporate disclosures to shareholders); ‘Voting Decisions at U.S. Mutual Funds: How Shareholders Really Use Proxy Advisors’, by Robin Bew and Richard Fields,Tapestry Networks and the IRRC Institute, June 2012 (findings based on review of the academic literature, plus interviews with 19 asset management firms with total assets of $15.4 trillion in assets under management, or more than half of the assets under management in the United States)’.  

[xxiv]http://www.gao.gov/new.items/d07765.pdf

[xxv] The following links were provided from the Shareholder Communications Coalition: 

http://www.shareholdercoalition.com/SCCTestimony_House_Financial_Services_Subcommittee_on_Capital_Markets_FINAL_652013.pdf

Society of Corporate Secretaries and Governance Professionals: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba16-wstate-dstuckey-20130605.pdf

National Investor Relations Institute testimony: http://financialservices.house.gov/uploadedfiles/hhrg-113-ba16-wstate-jmorgan-20130605.pdf

Business Roundtable press release on the hearing: http://businessroundtable.org/news-center/u.s.-business-leaders-continue-to-press-the-securities-and-exchange-co/

A webcast of the hearing can be viewed through the following link: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=335917

[xxvi]http://www.sec.gov/rules/petitions/2013/petn4-666.pdf

[xxvii] The most recent Roundtable occurred December 5, 2013, http://www.sec.gov/spotlight/proxy-advisory-services.shtml. Issues discussed in these Roundtables and in the proxy voting concept release include: broker over-voting and under-voting of the shares they hold on behalf of clients (less a problem now due to broker no-vote rules); the possibility of allowing some means of confirming a shareowner’s vote was actually cast as instructed; the possibility of helping institutions who have loaned shares recover those shares in time to be allowed to vote; proxy distribution fees charged by brokers; the limited ability of corporations to communicate with their shareowners  (due to non-objecting vs. objecting beneficial owners’, aka NOBO vs. OBO
rules that prevent companies from knowing the identity of their shareholders); approaches for promoting retail investor participation; data tagging of proxy
materials; dual record dates, empty voting, and, notably, proxy advisory firms. http://www.shareholdercoalition.com/roundtables.html

[xxviii] The Role of Institutional Investors in Promoting Good Corporate Governance, Corporate Governance, OECD Publishing. OECD (2011),

[xxix]http://www.oecd-ilibrary.org/governance/the-role-of-institutional-investors-in-promoting-good-corporate-governance_9789264128750-en

[xxx] See, e.g., comment letter submitted by the ICD to the CSA on potential regulation of proxy advisory firms. Stan Magidson, Canadian
Securities Administrators Consultation Paper 25-401 Regarding Potential Regulation of Proxy Advisory Firms Dated June 21, 2012 (20 August 2012) Institute of Corporate Directors, 4.6www.icd.ca/Content/Files/News/2012/20120820_CSA_Comment_EN_Final.pdf.

[xxxi] Source: http://www.ccgg.ca/site/ccgg/assets/pdf/model_policy_on_engagement_with_shareholders.pdf

[xxxii]Report of the NACD Blue Ribbon Commission on Board-Shareholder Communications  (Washington,DC: NACD, 2008; 2014 edition pending).

[xxxiii] In the U.S., under Section 14(a)8 on shareholder proposals, resolutions must meet certain criteria to be included for a shareholder vote. For example, they may not be about ‘ordinary business’. Note however, that the so-called ordinary business exclusion has been narrowing over the years, with more and more topics being considered appropriate for a proxy vote. Examples in the U.S. include the famous Cracker Barrell decision regarding
employee policies, and the more recent addition of proxy access bylaw resolutions. For actual rule as it now exists see http://www.law.cornell.edu/cfr/text/17/240.14a-8

[xxxiv] ‘400+ client-specific custom [voting] policies’, which in aggregate account for more than ‘50 percent of ballots that flow through ISS’voting system’ Patrick McGurn, Martha Carter, Carol Bowie, and Debra Sisti,‘Twelve for 2012: Notable Changes to the ISS Benchmark Voting Policy for the Upcoming Proxy Season’, December 7, 2011, 3, cited in note 17 of Bew and Field, op. cit., note 24.  

[xxxv] In one closely watched proxy season (2006), a negative ISS recommendation on a management proposal was associated with a 28.7% reduction in ‘for’ votes across all shareholders, but a 63.8% drop in the support of mutual funds. When both management and ISS opposed a shareholder proposal, shareholder support dropped by 33.3% across all shareholders and by 53.1% for mutual funds. Source: James Cotter, Alan Palmiter, and Randall Thomas, ‘ISS Recommendations and Mutual Fund Voting on Proxy Proposals’, Villanova Law Review55, no. 1 (2010), 3, cited in Bew and Field, op. cit. note 24. 

[xxxvi] http://www.centerforcapitalmarkets.com/wp-content/uploads/2010/04/Best-Practices-and-Core-Principles-for-Proxy-Advisors.pdf

[xxxvii]The full text of the Principles can be found at http://www.oecd.org/daf/ca/corporategovernanceprinciples/31557724.pdf

Date: August 2013

Type: Perspectives Paper

Background

Corporate directors around the world have become increasingly aware of the need to provide a holistic view of a business enterprise, incorporating financial as well as environmental, social and governance frameworks, in order for key stakeholders to make economic decisions.

Globally, much work has been done to align international accounting standards, which form the basis of reporting of the annual financial statements; at present that task is incomplete. There has also been an increased focus on developing a framework for Integrated Reporting, with the International Integrated Reporting Council (IIRC) driving forward this body of work.  The IIRC’s goal is to create a framework that brings together the varying reporting requirements in a “clear, concise, consistent and comparable format”[1], which will “support transition to a more sustainable global economy”[2].

The IIRC’s Consultation Draft on the international Integrated Reporting framework defines an Integrated Report as “a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”[3]

There are numerous participants in this movement, which includes the Sustainability Accounting Standards Board (SASB), which is currently developing sustainability accounting standards for use by publicly listed entities in the United States for disclosing their material sustainability issues in their SEC Forms 10-K and 20-F. Other participants include the World Intellectual Capital Initiative (WICI), a global movement to encourage sustainability reporting, and the Global Reporting Initiative (GRI), which has produced the leading framework for sustainability metrics. GRI released its revised G4 guidelines in May 2013.

All of these participants have added value to the dialogue; however the global realities in applying this vision may limit its success given the challenges described below.

The ultimate purpose of any form of corporate disclosure is to provide material information to the market and stakeholders. There is no point in devising an elaborate structure of disclosure if no one is listening.  Consequently, we need to be certain that there is genuine investor demand for what is disclosed – that it adds value to their investment process and is not just “nice to know”.

Mindful of the importance of stakeholder communication, the Sustainable Development Forum of the Institute of Directors, Southern Africa (IoDSA), put forward in their Position Paper 3, Integrated Reporting[4] the following anticipated benefits for entities preparing an Integrated Report:

– A more informed strategy and operational plans to support this strategy, based on an understanding of core value drivers;

– A true reflection of effective management of the opportunities and risks associated with sustainability considerations;

– Accountability of internal management for their performance;

– A platform for strategic communication and conversations with stakeholders that provides a meaningful account of performance, builds trust and helps inform strategy;

– Unlocking “value” from stakeholders and the market, through engagement on key issues;

– A wider view of the organisation’s impact beyond financials, which can reveal valuable opportunities for value enhancement;

– Increased internal awareness about corporate social responsibility; and

– Increased trust, confidence and support by transparent reporting about the full societal impact.

Directors’ Roles and Concerns

Non-executive directors are the gatekeepers of governance and provide the link between the shareholders and the management of the entity.  As a group, directors place a high value on the following and believe corporate reporting should result in: 

– concise, simple and focused reports that identify the material business risks that an entity faces, how that entity manages those risks and how they determine their success in managing those risks;

– a principles-based, non-regulatory “if not, why not” styled approach that allows entities to report on issues that are relevant to their business and allows directors to apply their collective expertise in overseeing the strategic objectives of the entity; and

– a framework that reduces the reporting burden on an entity and provides relevant and reliable information that is useful to the key stakeholders of an entity.

As stated in the paper on Integrated Reporting from the Sustainable Development Forum (Published as paper #3 by the IoDSA in November 2010):

“Reporting entities are at different levels of maturity in their reporting of sustainability issues. Some may have already begun the process of integrating strategy and governance with risks and opportunities, while others are just at the start of this process. The scope, extent and format of financial reporting are well bedded down internationally but the same cannot always be said of sustainability reporting. International and local work on Integrated Reporting hopes to contribute significantly to the understanding and guidance in this regard. At its very core, however, Integrated Reporting should be a reflection of a balanced and integrated approach to performance, strategy, governance and long-term viability as influenced by each company’s unique circumstances. Ultimately, the test of effective reporting is not only what is reported but how well stakeholders are able to understand the vision, strategy, risks and performance of the company and the broader impact of these leadership choices on society.”4

GNDI have a number of concerns with Integrated Reporting, which are set out below. This list sets forth the key challenges in achieving an international Integrated Reporting Framework and accompanying guidance:

– There is a need to understand, recognise and provide for varying jurisdictional and pre-existing business reporting requirements.

– The potential for increased regulatory supervision requirements, as many entities are required to comply with multiple regulators and regulations.

– The potential to significantly increase the cost burden of compliance for entities, through the need to engage with subject matter experts to assist in the preparation of disclosures, as well as increased audit costs for external auditors or other 3rd party accreditation organisations to verify the disclosures; increased investment in information technology to record and maintain information for inclusion in disclosures.

– There is the potential for an increased expectation that directors can realistically take responsibility for these disclosures, especially in large complex corporations, and the consequent impact on directors’ liability. In many jurisdictions, the onus for correct reporting to shareholders lies with the board.

– Given that globally directors’ liability differs from country to country, there is a need to provide a robust strategy on how to address liability issues, whether this is through the provision of globally accepted and harmonised safe harbours or a broad business judgement rule.

– There is a need to acknowledge that certain confidential information within an entity provides a strategic and competitive advantage and should not be required to be disclosed.

– There is the potential for increased focus on the audit committee and the procedures undertaken by this committee in its relationship with the external auditors in providing external assurance on the disclosures. 

– An increase in the compliance load on directors, with the potential to reduce the time available for them to provide strategic guidance about business performance, for the benefit of stakeholders. 

– A risk that the framework and accompanying guidance will result in boilerplate disclosures within industries, thus defeating the main aim of Integrated Reporting.

– The additional complexities that multinational entities face, both in terms of compliance with an Integrated Reporting framework should global consensus not be obtained, and also with respect to the varying governance frameworks within the countries in which they operate.

– The potential to constrict the ability of smaller business to potentially access capital markets.

– The absence of a single body with the oversight or authority to bring together the individual elements of reporting which are essential for an integrated picture of an organisation and the impact of environmental and social factors on its performance. (There is a risk that as individual regulators respond to the risks faced, multiple standards will emerge.)

– The lack of comparability, as entities are at differing levels of maturity with respect to their reporting on sustainability issues.

GNDI believe that the IIRC needs to address the following as priority issues:

– Setting robust materiality criteria.  Developing a clear definition of materiality is critically important to the success of developing the Integrated Reporting framework.

– Identifying the types of entities that would apply an Integrated Reporting framework.  Should SME’s choose to follow the Integrated Reporting framework, this should be applied on a proportionate basis. 

– Ensuring global consistency, (which we note has not been achieved yet for financial reporting under IFRS), perhaps through an oversight body.

– Ensuring that the framework addresses the directors’ liability issue.

– Providing guidance on how the Integrated Reporting framework would fit within individual countries corporate governance framework, tax and corporate laws.

– Determining the cost/benefits and implementation implications for entities and their shareholders.

Encompassing all the above within a principles-based, non-regulatory, “if not, why not” style framework that recognises the diversity of business, encourages innovation and promotes entrepreneurial activity.

Key Integrated Reporting Developments Around the World – Some Highlights

Australia In Australia, listed entities are required to include an operating and financial review as part of their broader Directors Report, the requirements of which are set out in section 299 – 300A of the Corporations Act 2001.In April 2013, the Australian Securities and Investments Commission (ASIC) released Regulatory Guide 247, Effective disclosure in the operating and financial review.  This guide details those disclosures ASIC believe to be in accordance with the intent of the relevant sections within the Corporations Act. Some of disclosures within the Directors Report are similar to the requirements set out in the Integrated Reporting framework. Sustainability reports are prepared on a voluntary basis in Australia.

Brazil There is not any provision requiring companies to do sustainability reporting in any law or regulation in the country (at least amongst most acknowledged ones). Despite that, sustainability reporting in Brazil has been increasing steadily. The number of companies that declare to report according to the GRI standards has grown from 3 in the year 2000 to 109 in 2012. In addition, as of 2011, Brazilian companies already represented 6% of all companies reporting according to GRI standards, being the fourth country in the top ten list of reporting countries. By the end of 2012 the BM&FBOVESPA, the Brazilian stock exchange, issued a recommendation that companies should indicate in their Reference Forms (most complete piece of information disclosed annually and updated regularly by listed companies), whether or not they publish a sustainability report, where is it available and, in case of not publishing one, the reasons for not doing that (in a Report or Explain fashion).

Supporting sustainability development as a whole, the IBGC has been hosting the GRI Focal point in Brazil since 2011, which “provides guidance and support to local organizations, driving GRI’s mission to make sustainability reporting standard practice”[5].

Besides that, the IBGC has taken part of the IIRC Council since 2012, represented by its chairwoman Sandra Guerra (there are also other Brazilian representatives in the Council and other IIRC governance bodies), and also has been participating in the local initiatives related to the development of the Integrated Reporting framework, as the public consultation (gathering a group of IBGC members to build a positioning on the issue), working groups and accompaniment commission.

Canada  Canadian public companies are required to disclose their corporate governance practices as well as provide disclosure related to environmental matters.  Sustainability reports are generally prepared on a voluntary basis in Canada.

South Africa The South African governance leadership has traditionally supported sustainability reporting. It is a key theme of the King Report series, chaired by Mervyn King, who currently chairs the IIRC. Useful guidance appears in the Integrated Reporting Sustainable Development Forum Position Paper 3 (November 2010), sponsored by Standard Bank.

The United Kingdom The UK government has already announced reforms to simplify and strengthen companies’ non-financial reporting. The restructure and simplification of the reports aims at giving all stakeholders, whether potential shareholders or existing shareholders, the information they need in a clear and effective way so they can be active stewards of the companies they own. The main changes to the reporting regulations include: 

– Introduction of a “Strategic Report”. This will apply to all companies and replace the previous ‘Business Review’. The aim is to allow the company to tell its story, starting with the strategy and business model and the principle risks and challenges the company has faced.

– A breakdown of the number of men and women on their board, in senior management positions and in the company as a whole. This follows on from the recommendations made by Lord Davies in 2011 in his review of women on boards.

– New disclosures on their greenhouse gas emissions. This will encourage the companies to think about ways in which these can be reduced.

– Reporting on any human rights issues, where necessary for an understanding of the development, performance, and position of the company’s business.

These narrative reporting changes will affect all reports produced in relation to financial years ending on or after 30 September 2013.

The Financial Reporting Lab in the UK provides an innovative new means of testing proposed disclosures. It brings both investors and companies together into an intensive dialogue and testing process before any new disclosure regulations are implemented. The aim is to ensure that any new disclosure requirements will genuinely add value, and not just represent an additional costly disclosure burden for companies. Based on this kind of approach, we could stress that any new disclosure framework should be justified by proper testing and an impact assessment.

Europe In April 2013, the European Commission proposed an amendment to existing EU accounting legislation in order to improve the transparency of large companies on social and environmental matters. Companies concerned will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related issues, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

Under the proposal, large companies with more than 500 employees would be required to disclose relevant and material environmental and social information in their annual reports. Concise information that is necessary for understanding a company’s development, performance or position would be made available rather than a fully-fledged and detailed “sustainability” report. If reporting in a specific area is not relevant for a company, it would not be obliged to report but only to explain why this is the case. Furthermore, disclosures may be provided at group level, rather than by each individual company within a group.

The proposed measure has been designed with a non-prescriptive mindset, and leaves significant flexibility for companies to disclose relevant information in the way that they consider most useful. Companies may use international or national guidelines which they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code).

Regarding transparency on boardroom diversity, large listed companies would be required to provide information on their diversity policy, covering age, gender, geographical diversity, and educational and professional background. Disclosures would set out the objectives of the policy, how it has been implemented, and results. Companies which do not have a diversity policy would have to explain why not. This approach is in line with the general EU corporate governance framework.

The United States The US Integrated Reporting movement dates to the American Institute of Certified Public Accountants’ massive report Improving Business Reporting (1995). This 200-page tome (called the Jenkins report after its chair, Edmund Jenkins) contained an “enhanced business reporting framework” to enable companies to “focus more on the factors that create longer term value, including non-financial measures indicating how key business processes are performing”. Out of that early initiative emerged the Enhanced Business Reporting Consortium, now affiliated with the IIRC. Existing regulations in the US related to sustainability already requires some disclosures. These include the Management Discussion and Analysis section of the annual report, which sets forth all key risks including non-financial risks. There are also disclosure requirements around such matters as conflict minerals (under the Dodd-Frank Act of 2010), as well as SEC guidelines on climate change. The National Association of Corporate Directors, a GNDI member organization, regularly includes sustainability reporting in its publications and educational programs. The NACD recently published an article on sustainability reporting; refer to “Sustainability Rising” in the January-February 2013 issue of NACD Directorship

GNDI Member Comment Letters about Integrated Reporting

A number of GNDI member organizations have commented on Integrated Reporting and their views can be found on their websites. 

GNDI Conclusion

GNDI supports corporate reporting that is principles based and enables entities and their boards to effectively communicate those issues of significance to their shareholders. Indeed, we recommend that companies strive to improve their reporting and this may be guided by the emerging Integrated Reporting framework, and using metrics when appropriate.  Such disclosures should be subject to the concerns expressed in this paper and be material to the investment decisions of shareholders. This said, however, we strongly caution against any government, regulator or stock exchange mandates.

We strongly encourage the IIRC for each disclosure requirement in the Integrated Reporting framework to vigorously test the disclosure and assess the potential impact of such disclosures on preparers.

We are of the view that should Integrated Reporting become regulated, it may again result in corporate reporting becoming compliance driven and overly prescriptive.

[1] Refer to the IIRC’s mission statement. http://www.theiirc.org/the-iirc/
[2] Refer to the IIRC’s vision statement. http://www.theiirc.org/the-iirc/
[3] Paragraph 1.3 page 8 of Consultation Draft of the International Integrated Reporting Framework [http://www.theiirc.org/wp-content/uploads/Consultation-Draft/Consultation-Draft-of-the-InternationalIRFramework.pdf]
[4] Institute of Directors Southern Africa’s Sustainable Development Forum: Position Paper 3 Integrated Reporting[http://c.ymcdn.com/sites/www.iodsa.co.za/resource/collection/4B905E82-99EB-48B1-BCDA-F63F37069065/SDF_Position_Paper_3_Integrated_Reporting.pdf] 
[5]https://www.globalreporting.org/network/regional-networks/gri-focal-points/focal-point-brazil/Pages/Focal-Point-Brazil-English.aspx