These Red Lines have been developed in accordance with Principles 1, 2, 3, 4, 5, 6 and 10 of the United Nations Global Compact plus associated Conventions of the International Labour Organisation, and the UK Corporate Governance Code
| Corporate Social Responsibility
S1.) If the company does not have a Corporate Social Responsibility and Health & Safety Committee chaired by a board director, or if the company is outside the FTSE 350 and it does not have a named board member with responsibility for this area as evidence of appropriate concern, vote against the chair of the board.
It is important for shareholders that companies maintain a close watch on these sources of risk to their reputation and business sustainability, and that this is actively overseen at board level.
This is in furtherance of Principles 1 to 6 and 10 of the UN Global Compact.
The remit of the committee is material, not the title and the company may decide that this committee should also have responsibility for environmental sustainability. This committee should have clear board accountability and be chaired by or reporting to a named board member. The committee should have oversight of policies and operational controls of health & safety and social risks and this should be integrated into the board agenda on strategy and business performance.
In terms of the effectiveness of operational controls, the committee should
- cover material issues relating to the risks of the company’s operations and markets;
- provide evidence that they are meeting regularly: the frequency should reflect the nature of the business but minimum twice a year; and
- provide evidence that the meetings are well attended by board members. There must always be at least one present and unless there are exceptional circumstances each board member appointed to the committee should attend every half-yearly meeting or, if there are more than two per year, at least 66% of them.
S2.) Year one: If the company has not committed itself to publish within the next 12 months equality monitoring data for its workforce covering at minimum gender, race and disability, and including management and board, vote against the re-election of the chair of the committee responsible for corporate social responsibility or, in the absence of such committee, vote against the chair of the board.
Year two: if the company has not begun annual publication of such data, vote as above.
It is in the shareholders’ interests that the company is employing the best people for the job regardless of their race, gender etc and the way to measure the company’s progress in this regard is by carrying out annual equality monitoring.
In order to measure progress on achieving diversity, with regard to provision B.2.4 of the Financial Reporting Council’s UK Corporate Governance Code, the tools need to be put in place with which to measure it. Equality monitoring is considered good practice as set out in guidance by the Equality and Human Rights Commission.
This Red Line is in furtherance of Principles 1 and 6 of the United Nations Global Compact, the ILO Equal Remuneration Convention 1951 No 100 and the ILO Discrimination (Employment and Occupation) Convention 1958 No 111. Their purpose is to ensure that all appointments are on the basis of merit.
For newly listed companies ‘year one’ will be deemed to be the first year that ends after listing.
S3.) If there is no diversity strategy in place to address a lack of minority ethnic representation at board or senior management level, and there is no visible minority representation at that level, vote against the chair of the nomination committee.
It is in the shareholders’ interests that the most senior executives have been selected on merit and, as stated by the Financial Reporting Council’s Corporate Governance Code, that the board has a wide diversity of talent. The purpose of this Red Line is to ensure that all appointments are on the basis of merit.
The issue here is whether there is a strategy in place. It is not about voting against boards without visible minority representation per se. Adoption of a diversity strategy is also in accordance with the guidance of the Equality and Human Rights Commission.
For a company with major overseas exposure it should consider the need to appoint to the board foreign nationals from the countries in which it operates in order to ensure that the board has a sufficiently deep understanding of these markets.
This Red Line is in furtherance of the Financial Reporting Council’s Corporate Governance Code which states that constructive and challenging dialogue is essential to the effective functioning of a board and that one way to encourage this is through having sufficient diversity on the board. The 2014 Code now states that this includes gender and race. The Red Line implements Clause B.2.4 of the Code which states that a section of the company’s annual report should include a description of the board’s policy on diversity, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.
This Red Line is also in furtherance of Principles 1 and 6 of the United Nations Global Compact, the ILO Equal Remuneration Convention 1951 No 100 and the ILO Discrimination (Employment and Occupation) Convention 1958 No 111.
The definition of ‘senior management’ should be determined by the board but should include the first layer of management below board level.
A strategy should set out what it wishes to achieve and how it intends to achieve it.
If the company fails to disclose whether there are any visible minorities at board and senior management level, vote against the chair of the nomination committee.
S4.) Vote against the re-election of the chair of the nomination committee if there is no strategy in place to address any under- representation of women at board level and fewer than 25% of the company’s board members are female.
It is in the shareholders’ interests that the most senior executives have been selected on merit and, as set out by the Financial Reporting Council’s Corporate Governance Code, that the board has a wide diversity of talent. This is also in furtherance of the Davies Review 2011 into low representation of women on boards which recommended that companies should aim for 25% representation by 2015. The purpose of this Red Line is to ensure that all appointments are on the basis of merit.
The issue here is whether there is a strategy in place.It is not about voting against boards with less than 25% female board representation per se. A review of the situation in March 2015 stated that the representation is now 23.5% on FTSE 100 boards and that there are no all‑male boards, and 18% in the FTSE 250 with 23 all‑male boards.
A strategy should set out what it wishes to achieve and how it intends to achieve it.
This Red Line is in furtherance of Clause B.2.4 of the FRC Corporate Governance Code which states that a section of the company’s annual report should include a description of the board’s policy on diversity, any measurable objectives that it has set for implementing the policy and progress on achieving the objectives.
It is also in furtherance of Principles 1 and 6 of the United Nations Global Compact, the ILO Equal Remuneration Convention 1951 No 100 and the ILO Discrimination (Employment and Occupation) Convention 1958 No 111.
| Equal opportunities
S5.) Vote against the chair of the nomination committee if the company does not have a policy of market testing of all board and senior management positions through an open appointments process for all vacancies.
It is in the shareholders’ interests that the company employs the best candidates for senior roles. The best way to achieve this is to ensure market competition for these roles through open advertising.
This does not mean that internal appointments are unacceptable, nor that recruitment consultants cannot be utilised. It simply means that the company should ensure open competition for these roles in order to be satisfied that it selects the best candidate.
This Red Line is in furtherance of the UK Corporate Governance Code which states that “there should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.”
It is also in furtherance of Principles 1 and 6 of the United Nations Global Compact, the ILO Equal Remuneration Convention 1951 No 100 and the ILO Discrimination (Employment and Occupation) Convention 1958 No 111. Their purpose is to ensure that all appointments are on the basis of merit.
It is recognised that while a company may have a strategy that is generally compliant, it may encounter circumstances in which an appointment needs to be arranged for a post but it would be commercially damaging for the company to publicise the prospective vacancy. We would expect voting on this Red Line to take that into account provided that diversity was part of the brief guiding the search. Absence of evidence for such a policy should not be taken automatically as evidence of its absence, but should give rise to further enquiry.
| Living wage and contracts
S6.) In furtherance of Principle One of the United Nations Global Compact, vote against the board’s remuneration proposals if any members of staff, including subcontracted staff employed in the UK,
• are paid below the Living Wage or where applicable the London Living Wage and the company has no plans to address this;
• do not have employment contracts specifying the number of working hours per week, or (aside from overtime with increased pay) allow more than a 25% increase or decrease on that figure to meet business needs.
Growth in productivity is in the shareholders’ interests and this is a serious issue in the UK. Studies show that greater productivity comes from a workforce that is paid fairly. This is also in furtherance of Section 172 of the Companies Act 2006 which requires directors to promote the success of the company with regard to the interests of its employees, the impact of the company’s operations on the community and the need to act fairly as between members of the company.
Regarding the Living Wage, the issue here is whether there is a plan to introduce the Living Wage if anyone is paid less than this. The plan must specify a timetable for its introduction. For the avoidance of doubt, this Red Line refers to the rate set by the Living Wage Foundation which in 2016 is £8.25 per hour outside London and £9.40 per hour in London, and not to the statutory National Minimum Wage while it is lower.
The specification on employment contracts takes German legislation as a model, which is also used in other countries: it recognises the need among some enterprises for flexible hours, up or down 25% on the specified contractual working time (specifically the German Part‑time Work and Fixed‑term Contracts Act, the Teilzeitarbeit‑ und befristete Arbeitsverträgegesetz).
In recognition of the current lack of disclosure in this area, in year one when investment managers engage with companies that have not disclosed the information required under this Red Line they will be expected to engage on this point. In year two failure to disclose this information will trigger a vote against.
| Political expenditure
S7.) Vote against political donations and political expenditure.
There is a serious concern that political donations and political expenditure by a company are likely to reflect the private leanings of senior management rather than the interests of the company or its shareholders.
The expressions “political donation” and “political expenditure” are to be construed in accordance with sections 364 and 365 of the Companies Act 2006.
Under section 366 of that Act, shareholder approval is generally required before any such donations are made or such expenditure incurred. The Red Line should not be taken to apply in circumstances where that section does not apply, e.g. where the donations made by the company and its subsidiaries total less than £5k for the last 12 months, or where a donation is made to an all party parliamentary group.
| UN Global Compact standards
S8.) Vote against the re-election of the Chair of the main board if there is a failure to abide by the UN Global Compact standards on freedom of association, including the recognition of independent trade unions for the purpose of collective agreement.
It is in shareholders’ interests that directors fulfil their duties under Section 172 of the Companies Act 2006 by conforming to international conventions that protect people’s rights to freedom of association within their own company and within the supply chain. Failure to do so may cause reputational damage, labour unrest and a fall in share value.
This is in furtherance of Principle Three of the United Nations Global Compact, the ILO Freedom of Association and Protection of the Right to Organise Convention, 1948, No 87, which protects people’s rights to join in association for the defence of the members’ interests. The Right to Organise and Collective Bargaining Convention, 1949, No 98, contains the right to collective bargaining, which depends on recognising an independent trade union with a democratic structure.
The lack of a recognised union in a company will not in itself trigger a vote under this Red Line. In order for this Red Line to be enacted a company will have committed a hostile act, such as refusal to grant a request for voluntary recognition made by an independent trade union (as defined by the Trade Union and Labour Relations (Consolidation) Act 1992 and certified as independent by the Certification Officer); derecognising or partially derecognising a trade union that is currently recognised or attempting to do so; or having a policy that is hostile to trade unions such as refusal to permit union representatives to visit the company’s premises by invitation of workers.
| Labour ethics
S9.) Year one: Where a company has breached labour standards or law, vote against the chair of the committee responsible for corporate social responsibility.
Year two: If undertakings made by the company in year one to establish procedures to prevent a repetition are not introduced, and/or there are further breaches, vote against the chair of the main board.
This Red Line is in furtherance of Section 172 of the Companies Act 2006 which imposes a duty upon a director to promote the success of the company having regard to, among other factors, the interests of the company’s employees and the desirability of the company maintaining a reputation for high standards of business conduct.
This is also in furtherance of Principles One to Five of the UN Global Compact. The persistence of labour rights violations in supply chains is a pressing issue. Four ‘core’ ILO Conventions entail an absolute prohibition on forced labour and child labour.
This might be evidenced by the determination of a court of law or major labour unrest that causes substantial value destruction. This does not include minor breaches. It would be helpful for trustee boards to receive feedback on how “major” and “minor” are interpreted by those entrusted with voting.
| Damaged reputation
S10.) Where the company has a history of major breakdowns of industrial partnership, or of serious endangerment of health and safety, or of fraud, bribery or other corrupt practices among its staff, or has sustained major damage from any of those causes in the year under report, and the directors’ report does not include a substantial account of how it is responding to resulting criticism and of the ways in which it proposes to minimise the risks of repetition, vote against the adoption of that report.
If the remuneration policy proposes any increase in salary or bonus for directors employed at the time of the incident, vote against the remuneration report.
It is of the highest importance to their shareholders that companies should learn the lessons of such shortcomings in their organisational culture and that they should take appropriate steps to secure and deserve a reputation for responsibility in the future.
It will be a matter for the judgement of the person entrusted with the vote as to whether incidents are “major” and as to whether responses are “substantial”. It would be helpful for trustee boards to have feedback on how those judgements are exercised.
This is in furtherance of Principles 1 and 10 of the UN Global Compact.
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