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  • BMO Real Estate Partners
  • Primrose Street
  • EC2A 2NY London
  • http://www.fandc.com
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  • Paula Garrido
  • +44 (20) 7011 4190

Lessons from crisis in danger of being wasted, warns fund manager

(PresseBox) (Frankfurt, ) Companies are still failing to embrace genuine cultural changes towards better corporate governance practices, despite increased demands from shareholders, according to one of Europe's largest institutional investors. At the launch of its annual Responsible Investment Report 2009 in London today, fund manager F&C highlighted that as companies have emerged from the recession, shareholder patience has been tested by generous pay packages that still lack clear links to longterm performance and refinancing proposals that flout basic shareholder protection principles.

The latest F&C Responsible Investment Report 2009 gives detailed information on the company's engagement activities in Environmental, Social and Governance (ESG) issues during 2009. During the year, F&C voted on almost 58,000 resolutions at 5,225 companies in 66 countries. This was almost double the number of votes cast in 2008, the result of a sharp rise in the number of clients that F&C now represents under its Responsible Engagement Overlay (reo®) service. This includes other institutional investors where F&C is not the portfolio manager.

Alongside scrutiny of board oversight and pay, areas of particular focus included the expansion of oil and gas companies into areas of the world presenting ever greater political and environmental challenges; the role of companies in promoting public health; factory labour standards; and sustainability in the real estate sector.

Voting trends in 2009

Over 2009, F&C voted in support of management recommendations 78% of the time, down from 81% in 2008. One of the reasons for this was a rise in F&C's opposition to the remuneration proposals put forward by management, from 15% in 2008 to 25% in 2009. Proposals on capital structures were another area of controversy, as companies under pressure to rebuild battered balance sheets often overstretched basic good governance rules.

Geographically, 2009 also saw a notable hardening of positions across several regions. For instance, in the UK, after years of productive companyshareholder dialogue, last year witnessed more confrontation. Pay plans in some of the UK's largest companies were an area of great concern, with F&C voting against management 19% of time, compared to only 10% in 2008. The picture also worsened in Australia, where F&C's opposition to remuneration plans rose from 21% to 27%, due to poor disclosure on pay deals.

During 2009, F&C continued to ramp up its engagement activity in emerging economies, with many visits to companies on their home territories. In Brazil, votes against management swelled from 13% to 27%, but this largely reflected a sharp rise in the proportion of small and mediumsized companies engaged whose standards of disclosure often lag their larger compatriots. On the other hand, opposition to director elections in Russia fell considerably from 54% to 38%, reflecting a change in F&C's policy position on cumulative voting to make the best of its limited ability to support the election of independent directors.

Where possible, F&C sought to join forces with other likeminded investors, as well as with companies and other stakeholders, to push for reforms in public policy. A major focus in 2009 was influencing the reforms to governance put in place following the financial crisis, as well as taking an active role on the global debate on climate change and the Copenhagen summit.

Outlook for 2010

The big surprise of 2009 was the speed of the global recovery, but in its report F&C warns that more work is needed to ensure that this growth be genuinely sustainable. Regulatory reforms following the financial crisis are still a 'work in progress' in many countries, but some of the debates and consultations that took place in 2009 are likely to start translating into hard policy this year.

2010 should see final decisions on what shape changes will take in areas such us governance reforms in financial institutions and more widely across the corporate landscape in the UK, as well as whether 'say on pay' will become mandatory for all listed companies in the US. Also, leading emerging markets have started to take action with stock exchanges and securities regulators tightening listing standards and rewarding companies with good ESG credentials.

Karina Litvack, Head of Governance & Sustainable Investment at F&C, said: "2009 was an extremely active year for shareholder engagement, as the recent financial crisis brought home the risks of poor corporate governance and the tragic spillover effect it can have on ordinary people far removed from financial markets.

But as signs of recovery begin to appear, there is a real risk that the lessons of this crisis will be wasted, as governments and investors alike go back to a 'business as usual' approach. In order to avoid a repeat of the systemic meltdown we just experienced, it is essential that reforms be put in place to promote both better governance at companies and more rigorous oversight by investors. The problems that beset the global economy, whether financial or sustainabilityrelated, have not disappeared, and farsighted measures are still very much needed to set ourselves on a more sustainable footing."

She added: "Regulatory reforms must be accompanied by the acceptance of good governance as a cornerstone of corporate culture. Companies need to show that both governance and pay are genuinely driven by the desire for longterm performance. Despite improvements, the recent furore over planned bonus payments in the banking sector suggests that a genuine cultural shift has yet to occur."