2017 SEASON REVIEW CASE STUDIES UNITED KINGDOM AGGREKO PLC ANGLO AMERICAN PLC BARCLAYS PLC BP PLC CENTAMIN PLC CHEMRING PLC CREST NICHOLSON PLC HAMMERSON PLC HSBC PLC JOHNSTON PRESS PLC PEARSON PLC ROYAL DUTCH SHELL PLC SPORTS DIRECT PLC SVG CAPITAL PLC THOMAS COOK GROUP PLC VODAFONE PLC WPP PLC Table of Contents INTRODUCTION .................................................................................................................................................... 1 GOVERNANCE CASE STUDY: WORKER REPRESENTATION AT BOARD LEVEL ...................................................... 2 Sports Direct CASE STUDY: DIRECTOR COMMITMENTS ................................................................................................ 3 Barclays, HSBC CASE STUDY: NOMINEE AND BOARD DISCLOSURE ........................................................................... 5 BP, Hammerson, Vodafone CASE STUDY: ESG PROPOSALS IN THE UK MARKET ......................................................................... 7 Royal Dutch Shell, WPP CASE STUDY: BOARD INDEPENDENCE AND SUCCESSION PLANNING .....................................9 Centamin REMUNERATION CASE STUDY: INCENTIVE TARGET ADJUSTMENTS .............................................................................11 Crest Nicholson CASE STUDY: REMUNERATION COMMITTEE DISCRETION .............................................................12 Pearson, SVG Capital I CASE STUDY: BP RESPONDS TO A DEFEAT ......................................................................................... 14 BP CASE STUDY: STRATEGIC INCENTIVE PLANS .......................................................................................15 Aggreko, Anglo American, Berkeley Group, Chemring, Johnston Press, Thomas Cook EDITORS & CONTRIBUTORS Martin Garcia Mortell Natasha O'Connor Bernadette O'Donoghue Cian Whelan Dimitri Zagoroff LAYOUT & DESIGN Kate Flanagan CONNECT & ENGAGE As the leading independent provider of governance services to the world’s institutional investors, Glass Lewis is committed to ongoing engagement with all market participants. For more information on our services and how to connect with Glass Lewis, please visit our website at www.glasslewis.com. II Introduction On the back of Theresa May’s election as prime minister in 2016, the momentum for corporate governance reform in the UK appeared to accelerate, and corporate governance entered the mainstream as various media outlets talked up the possibility of another "shareholder spring" over executive pay in 2017. Indeed, there was significant apprehension among issuers as approximately two-thirds of the FTSE 350 were to submit their remuneration policies for binding approval by shareholders this year. Such policy votes, which are only required to be held once every three years, were the subject of much engagement as well as intense investor, media and political scrutiny. In terms of actionable specifics, investor groups forewarned issuers of concerns around quantum, alignment with long-term value, and the complexity of short- and long-term bonus plans. As a result, remuneration committees have, generally, exercised restraint in granting pay increases; enhanced shareholding requirements; diversified the metrics against which long-term incentives are measured; and simplified incentive schemes that were perceived as being overly complex. A handful of boards also made meaningful attempts to disclose CEO pay ratios, in order to illustrate CEO pay as compared with that of a company’s wider workforce, and gender pay gap data. Elsewhere, government-backed reviews last year called for greater diversity at both board and senior management levels at FTSE 350 companies. Enhancing the diversity of boards so their compositions better reflect the demographics of employees, customers and other stakeholders is seen as crucial to companies' capacity to deliver on their wider social responsibilities by ensuring that a broader range of social perspectives, talent and expertise can influence decision-making. While the question of reporting on ethnic diversity remains an open one (the Parker Review is currently still out for consultation), the majority of FTSE 350 issuers continued to disclose relatively non-committal gender diversity policies, promising only to consider diversity in its broadest sense when making appointments, rather than specifying hard targets. This report comprises a series of case studies illustrating our observations on these and other topics from the 2017 UK proxy season. 1 CASE STUDY Worker Representation at Board Level Sports Direct (LSE: SPD) THE BIGGER PICTURE Market Cap: £1.58 billion Though common in continental Europe, broad- ening board representation beyond sharehold- The balance of UK governance shifted just a tiny ers (and management) represents a fundamental bit in April, with news that the board of FTSE 250 change to UK governance. Theresa May raised retailer Sports Direct had appointed its first workers’ the prospect of employee representatives on representative following a ballot of 23,000 employees. boards during her successful campaign for the Conservative Party leadership last summer, citing Alex Balacki, a 30 year old store manager who joined concerns that non-executive directors are gener- the company as a casual sales assistant when he ally drawn "from the same, narrow social and pro- was 17, was elected from a pool of three candidates fessional circles as the executive team". identified by an earlier internal review process. However, Ms. May's government was subsequent- Mr. Balacki will attend all scheduled board meetings ly deemed to have watered down the idea with over a 12 month period, but will not be made a director. the publication of its green paper on corporate Rather, controlling shareholder Mike Ashley envisions governance reform in November, which suggest- Mr. Balacki’s role as “ensuring that [the workers’] voice ed only that an individual non-executive director is head in the boardroom”. The move comes as part be tasked with workforce engagement. Moreover, of broader efforts to reform the Company’s image reaction to the green paper revealed ongoing following a torrid period, during which it dropped out corporate resistance to the notion of directly in- of the FTSE 100 having been accused of operating its volving workers in board affairs. central depot like a “Victorian workhouse”. Given that only one FTSE 350 board comprises a bona fide worker director (transport business FirstGroup plc), proceedings at Sports Direct are sure to come THE TAKEAWAY under intense scrutiny as a test case of the feasibility and broader applicability of such appointments. Employee representatives may not be appropri- ate for all businesses, depending on the size Mr. Balacki’s personal experience will also be viewed of the workforce and its relationship with by many as a barometer of the depth and authenticity management. However in the right circumstances, of reforms being led by board chair Keith Hellawell, they can provide a means of broadening the who many shareholders believe to be an ineffective board's perspective, and rebuilding trust with counterweight to controlling shareholder Mike Ashley. stakeholders including employees themselves, as well as the wider public. We believe it should be up to each company to decide the best approach for their business, and we welcome initiatives taken by, for example, Rolls-Royce, which held its first staff AGM this May. And regardless of whether an employee representative is deemed necessary, it seems clear that all boards should be giving serious thought to how they might strengthen communication with workers going forward and how such processes, and the outcomes thereof, might be reported to shareholders. 2 CASE STUDY Director Commitments Barclays plc (LSE:BARC) AGM: May 10, 2017 Market Cap: £35.2 billion THE BIGGER PICTURE HSBC Holdings plc (LSE:HSBA) The rising obligations of directors across AGM: April 28, 2017 a variety of sectors, and just what is an Market Cap: £145.9 billion appropriate level of commitments, are topics that come up frequently in our engagement conversations with issuers and stakeholders. The 2017 AGM season saw two UK banks, both FTSE Section B3 of the UK Corporate Governance 100 constituents, confronted with shareholder con- Code states that "[a]ll directors should be able cern over its directors' external commitment levels. to allocate sufficient time to the company to discharge their responsibilities effectively". The At Barclays, newly-appointed NED Sir Ian Chesire question as to what constitutes efficacy is given also serves on the boards of FTSE 100 firm Whitbread no further colour in terms of time commitment, plc as senior independent director, FTSE 250 firm nor indeed are there concrete thresholds given Debenhams plc as chair, and as chair on a further in terms of the number of directorships which two public company boards. In addition, Sir Ian is may represent a problem, save that the board chair designate of the company's ring-fenced UK "should not agree to a full time executive bank. At HSBC, NED Paul Walsh also chairs FTSE director taking on more than one non-executive 100 firm Compass Group plc and serves on a total of directorship in a FTSE 100 company nor the five public company boards, and NED Irene Lee chairmanship of such a company". serves as executive chair of one Hong Kong-listed real estate company and as a NED on five more public The 2009 Walker Review of corporate gov- company boards. ernance in UK banks and financial institutions