Responsible ownership

1. Responsible ownership Erik Breen Presentation for VBA April 29th, 2008

2. Statement 1Responsible ownership is a hype and will pass by For Abstain Against

3. Statement 2Only large pension funds (over 15 billion euro) can fill in their responsible ownership For Abstain Against

4. Context and agenda Clients and society ask for responsible ownership • Hype or trend? Institutional investors have to have a response • Building your own policy or use international codes? • Which instruments are available for implementation? Engagement led divestment • Elaboration of the latest innovations Conclusion

5. What is responsible ownership? • “The choice of a common stock is a single act, its ownership is a continuing process. Certainly there is just as much reason to exercise care and judgment in being a shareholder as in becoming one.” • B. Graham and D. Dodd, • Security Analysis, 1st Ed. • (McGraw Hill, 1934) at p. 508.

6. Individuals become more critical and call for accountability from companies, pension funds and asset managers Trust of benefical owner Trust me Tell me Join me Show me Involve me Accountability and transparency from company or investor

7. The call for responsible behavior is a trend Growing, long term trends • Scarcity of natural resources • Population and global wealth • Impact of international NGO’s • Spread of information • Awareness and demands from individuals • Globalisation and increasing power of companies • Transparency and accountability of companies

8. Building a response as institutional investor

9. Choices to be made … How to define norms and values • From external codes of conduct • From “internal” shared values • Blend of external and “internal” Which instruments to use • Universe selection • Exclusion (negative selection) • Best in Class (positive selection • Positive theme products • Integration in buy and sell decision • Ownership responsibilities • Voting • Engagement (active dialogue) The end determines the means

10. External values and norms “Internal” values and norms • Advantages and disadvantages • External, independent reference • General and overarching principles • Fits heterogeneous party • Easier to adopt • Application often requires interpretation and analysis • Advantages and disadvantages • Can be challenged on its grounds • Tailor made and well carved out • Fits specific homogeneous party • Takes more time to develop • Clarity may advance straight forward application Options in defining norms and values

11. Options in defining norms and values Often used external codes of conduct and external references • UN Principles for Responsible Investment (www.unpri.org) • UN Global Compact based on: (www.unglobalcompact.org) • Universal Declaration of Human Rights (www.udhr.org) • ILO’s Declaration on Fundamental (www.ilo.org) Principles and Rights at Work • Rio Declaration on Environment and (www.un.org) Development • UN Convention against Corruption (www.un.org) • Global Reporting Initiative (transparency) (www.globalreporting.org) • International Corporate Governance Network (www.icgn.org) • Code Tabaksblat (www.commissietabaksblat.nl) • Ethical Guidelines for the Government Pension (www.regjeringen.no/en.html) Fund (from Norway’s Ministry of Finance)

12. Available instruments to implement a responsible policy

13. How can investors influence companies? • Through legal rights … • Voting rights • Class actions … and other practices … • Private dialogues • Public statements • Shareholder coalitions • Buy and sell • Exclusions … on numerous topics • Corporate governance • Social and environmental • Strategy and capital structure

14. Clean hands or feet in the mud ? Can I have a portfolio with securities of responsible companies? • Exclusions and Best in Class • Aimed to avoid and keep clean hands • Exclusion of non-responsible companies • Shift in risk-return profile compared to conventional investing • No direct impact, especially not on more controversial companies Can I have a responsible effect on the companies in my portfolio? • Voting and engagement • Aimed to improve behaviour hands on • No exclusions • Comparable risk-return profile compared to conventional investing • Direct impact, also on more controversial companies

15. Engagement is most effective to aim for more responsible behavior • (minimal) • Exclusions Best in Class Voting Engagement • Impact No investments No investments Vote against Active dialogue to • in your products in your behavior management improve behavior • Investor passive passive re-active pro-active • Company passive active ? avoidance ? interactive • Common tobacco, arms, environment, voting policy external codes • criteria alcohol, etc. society and of conduct and • human rights value creation • Means and niche capital niche capital main stream potentially • resources (limited) (limited) (extensive) main stream • (extensive) • No restrictions upfront • Restricting investment opportunities

16. Exclusions and best in class

17. An exclusion policy is often product related rather than company behavior related Feasible policy External impuls Impact assessment

18. Negative or positive selection restrict the investment universe NO Unacceptable Best in Class Preferred • Best in class universe

19. Voting your shares

20. Institutional investors have to apply transparency or explain Best practices will be effectuated by law from January 1st, 2007 • Institutions publish voting policy • Institutions report on execution • Institutions publish voting records Underlying principle • Institutional investors make a careful and transparent judgment whether or not they will use their voting rights.

21. Voting is concentrated in the second quarter • Robeco votes at 1,200 AGM’s a year, mostly handled electronically • About two third of these meetings are held in the second quarter • In a top week 120 meetings are held • Off season there are around 5 to 15 meetings a week

22. Independency of Dutch board committees has increased significantly • Source: RiskMetrics Group

23. Number of meetings with “sustainable” agenda items Voting on sustainability issues occurs seldom outside the United States • Robeco voted in 2007 on 100 agenda item abouts sustainability • In 63 cases Robeco voted against management recommendation • In 84 cases it concerned a meeting in North America

24. Money starts talking Voting is more and more used to influence decision making. Reasoning for votes against management proposals are more often explained. Selling is no longer the only option an institutional investor has. Having a continued, constructive dialogue is seen as the way forward.

25. Engagement aims to influence company behavior

26. Information • Bedrijf • Invloed op beslissingen • Shareholder • Company • Influence on decision • Omgeving • Stakeholders • werknemers • klanten • milieu • overheid • employees • customers • environment • government • suppliers • local community • …. • toeleveranciers • locatie van vestiging • …. Engagement means an active, constructive dialogue with companies • Engagement is an approach which investors practice to actively influence companies to optimize the balance between profit, socially and environmental effects. • The aim is to enhance long term shareholder value creation.

27. $ % Investment Portfolio Company’s willingness » ▲ Value creation and risk mitigation Company’s ability Effective engagement deals with significant subjects Change through dialogue

28. Each phase requires a different, well considered choice of communication methods • Fact finding mission • Factual questions • Strictly business, no emotions • Usually by e-mail Opening a constructive dialogue • More challenging questions • Discussing arguments for different scenarios in a consultancy role • Preferably face to face Influencing opposing opinions • More directive with clear statements, views and arguments • Sharp on content, soft on tone of voice • Different channels including AGM and media

29. Jointly call an EGM Specific site visit Joint meeting with management Arrange a joint shareholder resolution Management meeting Company visit Active voting plus report Joint letter Speaking jointly at AGM / EGM Telephone call Letter and e-mails Management meeting Speak at AGM / EGM Attend AGM / EGM Appropriate communication is crucial for effective change High impact Joint open letter Open letter Issue press release Give press quote Speak on conferences Low impact Costs Reputation Risk High High Low Low In public, through media Collective with all shareholders Collective with large institutes Private

30. Our engagement process has twenty steps and addresses –among others - the following: • Which objective and strategy? • Measurable objective (SMART) • Strategy (incl. communication) • Relation check • Shareholder base • Which company or companies? • Led by occasion, theme or plan? • Including peers on similar topics • Directed theme research (outsourced) and company analysis Final go or no go decision • Dialogue • Constructive dialogue based on facts and arguments • Evaluation of responses • Establish contact • Inform internal key persons • Establish contact and relations • Give context and verify facts with the target company Declare success or failure based on the objective. Close case for report. Choose to follow up (optional) or give divestment advice (optional)

31. Necessary conditions for successful engagement • Large pension funds and independent asset managers are well positioned to practise engagement successfully • Size creates access (voice can only create access in consumer stock) • Independence avoids conflicts of interest • Knowledge creates a level playing field • Resources to deal with the workload

32. Pieces falling together in the latest innovation:Engagement led divestment

33. Step 1 Client defines its policy statement Step 2 Service provider identifies key indicators per industry. The key indicators are linked to the client’s policy statement, which is also used to define a minimum acceptable levels in order to measure progress. Step 3 Service provider engages with a selection of companies and measures the progress of companies under engagement according to key indicators Step 4 Service providers advises client to exclude companies that show lack of progress on the key indicators and fail to meet the pre-defined minimum acceptable levels Step 5 Apart from the interaction between the client’s policy and predefined set of key indicators attributed per sector, there is room to choose one or two topical themes per year which will follow a similar process Possible exclusion Assess progress Engage Indicators & Criteria Policy Summary of proposed steps

34. Step 1 Client defines its policy statement Choices 1. Content 2. Level of detail 3. Level of reach and impact Example on level of detail “Encourage companies to respect human rights” “Companies should not make use of child labor” Example on level of reach and impact “Companies should not make use of child labor” “No investments in companies that structurally use forced labor in their production or in the production of their supply chain” Policy The proposed process step by step

35. Indicators & Criteria Policy The proposed process step by step Step 2 Service provider identifies key indicators per industry. The key indicators are linked to the client’s policy statement, which is also used to define a minimum acceptable level in order to measure progress. Example given:

36. Step 3 Service provider engages with a selection of companies and measures the progress of companies under engagement according to key indicators Choices - Prioritization of key indicators and industries in discussion with the client - Engagement on key indicators over all industries is realized over years - As a result over time all key aspects of all industries are covered in a very structural approach Engage Indicators & Criteria Policy The proposed process step by step

37. Step 4 Service provider advises the client to exclude companies that show lack of and 5 progress on the severe, key indicators and fail to meet the pre-defined minimum acceptable levels Nature The advice includes: of 1) the actual company behaviour; advice 2) indications of the company’s (un)willingness to adjust this specific behaviour and; 3) the judgement of this behaviour under application of the client’s policy and with respect to external, internationally accepted principles such as the UN Global Compact, its subcomponents and where relevant (interpretations of) other codes of conduct as adopted by the Dutch government. The client decides on the advised exclusion and orders implementation Possible exclusion Assess progress Engage Indicators & Criteria Policy The proposed process step by step

38. Possible developments in mainstreaming responsible investments

39. Best in class funds Theme funds Possible development of mainstreaming responsible investments Core Theme Ethical Responsible Return only Responsible equity portfolio Minimal exclusions Voting and engagement led divestment Traditional equity portfolio Theme funds

40. Questions?

41. Contact details: F.C.Breen@robeco.nl

42. APPENDICES

43. APPENDIX 1Collaboration of institutional investors About fellow shareholders in the same game

44. Institutional investors become more active and see their powers enhanced • Institutional investors recognize they are all fellow shareholders Collaboration between fellow shareholders makes sense • Power - Bundled voting power • Effectiveness - One voice with one message • Efficiency - Sharing work load • Balance - Adding arguments and challenging views • Continuity - Longer term relationship • Institutional investors safeguard their own identity Support of arguments but no association Arguments count, but there is a lot more to it: • The balance of arguments • The tone of voice • The required timelines • The communication method used • The history of the relationship

45. Examples of existing investor networks • Eumedion - Dutch governance network with foreign members as well • GIGN - International governance network • UN PRI - Clearing house for engagement cases • CDP - Widely supported call for more transparency on emissions • EITI - Call for transparency on bribery & corruption in mining sector • Eurosif - European network of social investment forums (Dutch: VBDO) • EAI - Call for more research on extra financial issues • On occasions on a case by case basis

46. APPENDIX 2Real life examples About Royal Dutch Shell, VNU, CSM, Euronext, Stork and ABN AMRO …

47. Story telling and questions • Royal Dutch Shell - Reserve scandal, accountability and unification • VNU - Buying IMS Health and selling to private equity • CSM - Fat balance sheet, new strategy and new CEO • Euronext - Strategic options and the European identity • Stork - Public to private and focus on Aerospace • ABN AMRO - Buying 1% and writing a letter

48. Why would investors influence companies? • Responsibility as owner • Obligation of having power Focused value strategy • Strong aligned with investments • Strategic consultancy “offered” • General value perspective • Universal owner • In general and in precedents • Identity as investor • Labour organisations, churches

49. APPENDIX 3Voting

50. "What is the overall importance to your firm of the corporate governance of portfolio companies?" “How do you expect your firm’s views of the importance of corporate governance to change over the next three years?” • Corporate governance is important and will even • become more important • Answers by 322 institutional investors from 2006 ISS Global Institutional Investor Study