Corporate Finance and Stewardship Report2016

Contents

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Foreword by Anne Richards, Chief Executive, M&G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Introduction by Rupert Krefting, Head of Corporate Finance and Stewardship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Corporate Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Equity fund raising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Takeover bids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Raising the profile of M&G in the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Responsible Investment and Stewardship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Overview of 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

– M&G’s Responsible Investment Advisory Committee (RIAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

– FRC Stewardship Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

– Department for Business, Energy & Industrial Strategy – corporate governance reform . . . . . . . . . . . . . . . . . . .14

Responsible Investment and Stewardship activities in 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

– Monitoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

– Engagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

– Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

– Social and Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

– Wider ESG activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

– UN Principles for Responsible Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

– Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

– Engagement with other stakeholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Foreword

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When M&G Investments was founded in 1931, it had a single purpose: to help its customers prosper by putting their savings to work. Some 85 years later we are an international business with offices and clients around the world. Total assets have grown to more than £260 billion*. Yet our purpose remains unchanged – a focus on creating wealth for our customers.

Throughout this time, responsible ownership has been a constant. We do this for two

reasons. First, we believe our customers want us to represent their interests to the

companies in which we invest their savings. Secondly, active engagement with the senior

management of companies on governance issues is value-enhancing, leading ultimately

to superior long-term returns.

As a long-term investor, we are ideally placed to influence corporate behaviour. At a time when the typical holding

period of an equity can be measured in months rather than years, our willingness to support companies throughout

their business and market cycles gives us great credibility with the management of companies.

In recent years our customers have begun to ask us to consider a wider range of governance issues than how the

board of directors conducts itself. Environmental matters and social issues are becoming increasingly important

aspects of assessing an investment. Our approach is to incorporate environmental, social and governance (ESG)

factors into our investment decision-making process by putting them at the heart of what we do.

Trust and confidentiality remain vital in our discussions with the directors of our investee companies. But we

recognise the growing appetite for more reporting on our engagement with management. It is entirely reasonable

that our customers see how we represent their interests, so I am delighted to introduce this new Annual Report

from our corporate finance team.

I hope you find the report useful.

Anne Richards

Chief Executive, M&G

*As at 30 September 2016.

Introduction

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I am delighted to present M&G’s Annual Corporate Finance and Stewardship Report for the year ended 31 December 2016.

This is the first time that M&G has published an annual report on its stewardship activities and it reflects the importance that M&G gives to being transparent to our customers and demonstrating how an active fund manager operates.

M&G is a responsible investor and as a result of investing our clients’ money for the long

term we can generate superior returns. In equities, one of the important factors in a

decision to invest in a company is its corporate governance and, to us, if a company is

well run it follows that the company is more likely to be successful in the longer term.

Environmental and social issues also play an important part (together they make up ESG).

There is no doubt that ESG responsibilities continue to evolve rapidly both within M&G and in the outside world.

M&G has always taken corporate governance seriously, and the long-term nature of our investment horizon puts us

in a good position to influence and improve corporate behaviour. In this report we detail some of the transactions

that M&G has been involved in, offer case studies of our voting and engagement activities and examples of our

interactions with external parties.

I hope that you enjoy reading this report and that it gives you a better insight as to how we discharge our ownership

responsibilities.

Rupert Krefting

Head of Corporate Finance and Stewardship

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Corporate FinanceM&G is an asset manager, and as a result of pursuing

an active investment policy and investing our client’s

money for the long term, we believe M&G can generate

superior returns for our investors.

As part of the role of being a long-term investor, M&G

plays an important part in maintaining the smooth flow

of capital through the equity markets for the benefit

of our investee companies and therefore our investors.

M&G invests in companies at all stages of their

evolution in the public markets: we invest at the

IPO stage – when a company first enters the equity

market; we can then help investee companies raise

further capital to fund expansion capital expenditure

or acquisitions, and finally we accept offers for our

investee companies when they are sold, aiming to

achieve a significant premium to the market price. In

this way, we can provide equity capital to our investee

companies to help fund their growth phase and then

recycle it back again into the market when we receive

the proceeds for companies that are sold.

In order to effect these processes efficiently and

discretely, M&G is prepared to be made ‘insiders’

and receive price sensitive information by investee

companies for short periods of time ahead of the

information being made public. Typically, this is in

relation to a transaction such as an equity capital fund

raising, a takeover offer or a significant management

change, where it is useful for the company and its

advisers to try to garner support from the major

shareholders to finance a transaction or get feedback

ahead of a management change.

M&G has a Corporate Finance and Stewardship team

which, amongst other things, acts as the gatekeeper to

the flow of this type of information into the investment

team. The process of receiving price sensitive information

is known as ‘wall crossing’.

In 2016 M&G was ‘wall crossed’ by 196 companies in

relation to proposed announcements before they were

made public. Amongst other topics:

• 122 were related to equity capital fund raising, of

which 14 were to finance acquisitions, and M&G

participated in 34 of the fund raisings

• 31 of the discussions related to potential M&A deals,

• 8 secondary sell-down placings, and

• 12 centred on board changes.

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M&G, as a long-term investor, can help companies

raise capital both by providing equity in a fund

raising and also by guaranteeing the success of a

fund raising. This is especially important when an

investee company is making an acquisition and needs

to provide the vendor with certainty over the source

of funds being used to finance a deal. Typically,

an investment bank will guarantee an equity issue

(known as ‘underwriting’) when certainty is required.

On these occasions, the bank will look to lay off part

of the underwriting risk to the larger shareholders.

This is called ‘sub-underwriting’ and it is a good way of

helping companies to raise capital in a cost-effective

way by reducing the risk and therefore the fee paid to

the investment bank as underwriter and at the same

time it earns a fee for our investors as a result of taking

on this risk. Fees will vary from deal to deal, but for a

rights issue the sub-underwriter can earn a commission

of 1% of the amount sub-underwritten , typically for a

six-week period.

Case studies of rights issues sub-underwritten in 2016Melrose Industries

Melrose, the specialist in the acquisition and

performance improvement of good manufacturing

businesses, announced the acquisition of Nortek, the

US manufacturer and distributor of products and

systems for use in building and remodelling homes

and businesses, for £2.1bn, including debt, and an

associated underwritten rights issue for £1.6bn. Even

though M&G held less than 1% of Melrose at the

time, we undertook to sub-underwrite over 5% of the

rights issue.

CobhamIn April, Cobham, an international company engaged

in development, delivery and support of advanced

aerospace and defence systems for land, sea and air,

announced an unexpected profit warning and the

intention to raise £500m via an underwritten rights

issue. There was a shortfall in profits in the wireless

division and a subsequent working capital pinch point

in H1, which might have led to a breach in the banking

covenants. A 10% cash placing to raise over £200m

was contemplated by the Board but was not deemed

to be enough. The Board was also keen to maintain

the dividend at an annual cost of £125m, meaning the

fund raising needed to be £500m to be on the safe

side. M&G sub-underwrote £50m in the rights issue,

which was more than double its pro rata entitlement.

InformaIn November, Informa announced the acquisition

of the US exhibition company, Penton, for £1.2bn,

which is significant compared to Informa’s market

capitalisation of £4.7bn. The global exhibitions market

is consolidating and the deal was not unexpected.

Penton strengthens Informa’s position in the US and

also enhances its business intelligence division. Equity

financing played a key role, with an underwritten

£715m rights issue. M&G indicated demand to the

underwriters for £90m of sub-underwriting for the

rights issue compared to our pro rata entitlement of

£21m (we were allocated £37.5m). The transaction

was well received by the market and the shares rose

3% upon announcement.

Phoenix GroupPhoenix, a UK-based specialist closed life and pension

fund consolidator, announced in September that

it had agreed to pay £935m to purchase Abbey Life

from Deutsche Bank, which would be part financed

by a £735m underwritten rights issue. This is in line

with Phoenix’s strategy of buying closed funds and

would improve Phoenix’s solvency position and allow

an increase to the dividend by a further 5%. The main

risk in the deal is that Abbey Life is in enforcement, but

Phoenix has capped its exposure to remediation and

professional fees. M&G sub-underwrote £40m of the

rights issue across a range of funds.

Equity fund raising

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John Menzies

UK-based newsagent John Menzies proposed the

acquisition of BBA Aviation’s aviation services division,

ASIG, for US$202m. ASIG had become non-core for

BBA Aviation following its acquisition of Landmark

in September 2015. The transaction made sense for

John Menzies as ASIG significantly strengthened and

broadened its existing aviation services division. The

deal was part funded by way of a £75m underwritten

rights issue and despite only having a small holding,

M&G sub-underwrote £12.5m across a range of funds.

M&G is a long-term investor and our general policy is to

support incumbent management if it is well regarded.

However, as part of a company’s evolution, there may

be times when a business is better suited to be part

of a larger group or where changes are required away

from the public markets and there is a buyer who is

willing to paying a significant premium to the market

price. In these circumstances, as an often reluctant but

pragmatic seller, M&G will look to reinvest the proceeds

in another company.

Case studies of investee companies involved in a takeover in 2016 DartyFrench retail chain Groupe FNAC made an approach to

acquire European electrical retailer Darty in November

2015 at 105p. South African retailer Steinhoff then

made an approach at 125p in cash, with support from

the Board and 14% of the register. A bidding contest

ensued between FNAC and Steinhoff. Steinhoff

moved first by increasing its offer to 138p, followed

swiftly by FNAC at 145p, Steinhoff at 150p and then

FNAC at 153p before Steinhoff closed the day with

an offer of 160p. Finally, FNAC increased its offer to

170p one week later and Steinhoff withdrew, to then

move on to Poundland as its next target. M&G played

an important role, talking to both sides to extract the

highest price for our investors and ended up selling

half its 4% stake in Darty at 153p and then the balance

at 170p, all to FNAC.

Premier FarnellSwiss manufacturing group Datwyler made a cash

offer for UK electronics distributor Premier Farnell at

165p in June with support from three shareholders

(not M&G) representing 18.4% of the share register. At

the end of July, and one day before the court meeting

was due to be held to approve the Datwyler takeover,

Avnet, a large US distributor, made a cash offer at

185p, representing a 12% premium to Datwyler’s offer.

M&G was supportive of Avnet’s higher offer, given

that Datwyler was not expected to match the price.

Datwyler subsequently withdrew from the bidding to

allow the Avnet offer to proceed. M&G had a 8.2%

stake and by accepting the Avnet offer at the last

minute, was instrumental in delivering the company

and extracting a price that was a 12% premium to

Datwyler’s offer.

Micro FocusUK-based software provider Micro Focus announced

the acquisition of Hewlett Packard Enterprise’s

(HPE) software business segment for an enterprise

value of US$8.8bn (representing 11.4x EBITDA).

The consideration was in new Micro Focus shares,

and Micro Focus shareholders will own 49.9% of the

enlarged share capital. Micro Focus shareholders

also received a special dividend of US$400m prior to

completion, which is expected to be paid in Q3 2017.

The deal was well received, the share price rose 14.7%

on the day of the announcement (35% over the year)

and the company is now in the FTSE 100. M&G has

been a long-term supporter and owns 3.8%.

Takeover bids

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The Corporate Finance and Stewardship team met

with the equity syndicate desks of Goldman Sachs,

Citigroup, UBS, Jefferies, Peel Hunt, Numis, Investec,

JP Morgan Cazenove, Citigroup, DNB, Morgan Stanley,

Credit Suisse and Deutsche to establish points of

contact on both sides, to discuss the introduction of

the EU’s new Market Abuse Regulations which came

into force on 3 July 2016 and to ensure that M&G is

included in all placings in the market that are structured

as equity book builds, especially for internationally-

listed companies. M&G has subsequently distributed

a list of its holdings to all of the banks it has met to

aid future dialogue and regular calls will be set up to

discuss potential upcoming blocks of shares for sale

that M&G might be interested in acquiring. We look

forward to building on these relationships in 2017 and

making sure that M&G is invited to participate in all

the deals that are of interest to the investment teams.

Raising the profile of M&G in the market

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Responsible Investment and StewardshipM&G’s investment teams incorporate environmental,

social and governance (ESG) considerations into their

decision-making and active ownership practices. This

approach is strongly aligned with M&G’s long-standing

principles as an active, fundamentals-focused investor.

Responsible investment is at the heart of what we do.

We believe our customers want us to represent their

interests to the companies in which we invest their

savings. In addition, we believe active engagement

with the senior management of all companies, including

governance issues, is value-enhancing, leading

ultimately to superior long-term returns. Alongside this,

we are cognisant of the broader stakeholder objectives

(including employees, customers, government and

societal) that need to be reflected in responsible

and ethical business practices – all contributing to a

responsible and sustainable business model.

During the course of 2016, we have focused on ensuring

that the support provided to the investment teams in

relation to ESG research and analysis continues to reflect

the emphasis our clients place on these issues. We have

improved the availability of information for clients on

our responsible investment and stewardship activities –

with more transparent disclosures and publication of

examples of our activities and rationale for our voting

decisions. We remain committed to the ongoing

evolution of our processes to ensure companies

are held to account on environmental, social and

governance issues. Further details are provided below.

M&G’s Responsible Investment Advisory CommitteeThe Responsible Investment Advisory Committee is an

internal forum representing M&G’s main business areas.

It oversees M&G’s RI activities and monitors ESG-related

developments. This group looks to ensure we are taking

a consistent approach to ESG issues across M&G. Our

regular meetings also present an opportunity to monitor

M&G’s involvement in the United Nations Principles for

Responsible Investment (UNPRI) and other RI initiatives,

and to coordinate the communication of M&G’s ESG

approach. Topics on the agenda in 2016 included

ongoing monitoring of developments at the UNPRI,

the impact of the recent raft of ESG/sustainability

ratings on our funds, emerging ESG risks faced by our

funds and the broader business, and M&G’s updated

Responsible Investment section of our website.

Overview of 2016

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Improved transparencyWe have continued our activities relating to company

engagement but have made significant improvements

in the way we communicate these to our clients and

other stakeholders via our ongoing disclosures.

M&G launched a new Responsible Investment

section of our website in March 2016 , setting out our

responsible investment approach and pulling together

the various aspects of M&G's ESG activities. During the

year, we added new content that included:

• an integrated version of M&G’s UK Stewardship Code

submission;

• an updated section on the Corporate Finance and

Stewardship team;

• videos explaining M&G’s approach to responsible

investment and ESG, and

• case studies of our ESG engagement with companies.

In Q3, for the first time, we published our voting

results for the previous quarter including rationales for

instances where we have voted against management

recommendations.

Ongoing commitment to the incorporation of ESG in the investment processM&G has been a signatory to the United Nations

Principles for Responsible Investment (UNPRI) since

January 2013, and has for many years supported the

practices and standards promoted by the Financial

Reporting Council (FRC) Stewardship Code and the

UK Corporate Governance Code. We seek to apply

these principles consistently across our investments

in global equities and continue to engage with and

respond to developments in the areas of responsible

investment to ensure the interests of our clients are

protected. Notable areas of development during 2016

are highlighted below:

In 2016, M&G Equities built on the existing ESG

support available to investment teams with ongoing

services provided by two leading providers of ESG-

focused information and analysis:

• MSCI ESG Research: providing ESG information,

analysis and screening across an investment universe

of global companies

• ISS-Ethix: supplying analysis based on companies’

performance against the principles of the UN Global

Compact, an initiative promoting good corporate

practice in the areas of human rights, labour rights,

bribery and corruption, and the environment.

These services provide M&G’s investment teams with

company-specific and industry-focused ESG analysis,

helping us to gain a better understanding of the

‘extra-financial’ issues faced by existing and potential

investments.

Supplemented by other sources of ESG information –

such as company reporting, third-party broker research

and media reports – the analysis supports investment

teams in their understanding of the ESG risks and

opportunities facing companies; it also provides

insights into how companies are managing those

risks and creates a solid basis for our interactions with

investee businesses on ESG issues.

Across M&G’s investment teams, we have initiated

discussions with companies flagged by MSCI and ISS-

Ethix as having ESG issues, to assess their approach to

these issues, and to monitor how they are managing

developments over time.

FRC Stewardship Code

In April 2016, the FRC notified us that it was going

to review the disclosures of signatory companies,

including M&G, to assess the quality of reporting

against the Code. As part of our commitment to the

FRC’s Stewardship Code, we focused on improving

the transparency of our stewardship activities and

providing full details of the approach we take. Our full

disclosure is available on our website.

The FRC’s Chief Executive, Stephen Haddrill, set out

the context for stewardship and its importance to the

long-term success of our economy:

“Constructive engagement between investors and companies is vital for the long-term success of our economy. Investors play a crucial role in encouraging companies to think more about their long-term strategy. Reporting against the Stewardship Code is not a box-ticking exercise and signatories were encouraged to provide a clear description of their approach to stewardship, with explanations for non-compliance where appropriate. We will be looking for continuous improvement from Code signatories, but

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we are pleased with the response to this exercise and many signatories have reaffirmed their commitment to quality, transparent reporting and to stewardship”.1

In November 2016, the FRC confirmed that M&G’s

Stewardship disclosures provide “a good quality and

transparent description of the approach to stewardship

and explanations of an alternative approach where

necessary.”2

Alongside reviewing our stewardship disclosures, we

have published for the first time our voting policy

and a supplementary guidance note on the approach

that investee companies should take to executive

remuneration.

Department for Business, Energy & Industrial Strategy – corporate governance reform

Under the leadership of the new UK Prime Minister,

Theresa May, the Department for Business, Energy

& Industrial Strategy published a consultation on

corporate governance reform in November 2016.

The paper sets out a new approach to strengthen big

business through better corporate governance and

focuses on:

• Shareholder influence on executive pay;

• Whether there are measures that could increase the

connection between boards of directors and other

groups with an interest in corporate performance,

such as employees and small suppliers; and

• Whether some of the features of corporate

governance that have served us well in listed

companies should be extended to the largest

privately-held companies.

We continue to engage with the Investment

Association, the trade body which represents the UK

investment management industry, on responding to

the consultation.

Our fund managers believe that the long-term

success of companies is supported by effective

investor stewardship and high standards of corporate

governance. We believe that if a company is run well, it

is more likely to be successful in the long term.

We maintain a constructive dialogue with the companies

that we invest in. We do this by meeting regularly with

company directors – both executive and non-executive.

These meetings are central to our approach and are

focused on identifying whether a company’s strategy

is aligned with our interests as long-term shareholders.

Social and environmental issues can also have an

important impact on company performance. Well-

managed companies should take these issues into

consideration as part of their successful development.

We look at how companies address these issues,

among other things, when we analyse them. We feel it

is one of the factors that influence a company’s long-

term prospects.

Our Corporate Finance and Stewardship team has

always been an advocate of responsible share

ownership and oversees our stewardship of the

companies we invest in. Active voting is an integral

part of our investment approach. We believe exercising

our vote adds value and protects the interests of our

clients as shareholders.

Monitoring

Responsibility for stewardship of a company rests

primarily with the company itself and M&G as a

shareholder is expected to hold the company’s board

of directors to account for its actions. Company boards

must consistently satisfy a number of stakeholders,

customers and employees as well as acting responsibly

towards society as a whole in order to ensure success

over the long term for the benefit of shareholders.

M&G meets regularly with the management of the

companies we invest in. In these meetings, we focus

Responsible Investment and Stewardship activities in 2016

1Source: www.frc.org.uk/News-and-Events/FRC-Press/Press/2016/November/Tiering-of-signatories-to-the-Stewardship-Code.aspx2 www.frc.org.uk/Our-Work/Corporate-Governance-Reporting/Corporate-governance/UK-Stewardship-Code/UK-Stewardship-Code-statements/Asset-Managers.aspx

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on the company’s strategy, its performance as well as

a broad range of ESG issues. We feel that all of these

factors influence a company’s long-term prospects.

In 2016, M&G attended 1,723 meetings, of which 707

were with the management of UK companies (including

497 meetings with companies in the FTSE350) and

1,016 international companies.

Engagement

M&G proactively engages on any issue which may

affect a company’s ability to deliver long-term

sustainable performance and value. Issues include, but

are not limited to:

• business strategy,

• performance,

• financing and capital allocation,

• governance,

• risk and internal controls,

• management and employees,

• acquisitions and disposals,

• remuneration,

• sustainability,

• culture and environmental and social responsibility.

When companies consistently fail to achieve our

reasonable expectations, we will actively promote

changes. These changes might range from helping

directors formulate a new strategy to the appointment

of new directors.

In addition to the investment team meetings, the M&G

Corporate Finance and Stewardship team also had

meetings with the chairman and directors of 108 FTSE350

companies and 65 international companies, focusing

on remuneration, strategy, board composition and

succession planning.

As part of this, we established a rolling programme of

calls with the chairman/senior independent directors

across our largest international holdings. Often there

was no particular concern and the goal of the calls

was to understand more about the business and to

establish a relationship for the future.

There was a wide range of topics discussed including

remuneration, succession planning, corporate culture

and long-term business planning. During the year we

contacted 45 overseas-listed companies and had calls

with 32 of these companies.

The consistent feedback is how rare our requests have

been – international companies frequently tell us they

only get requests of this nature once or twice a year.

This is in clear contrast to the UK where these calls

are relatively normal practice. Particularly noteworthy

calls under this programme included Lufthansa, CESC,

Columbia Sportswear and Hollysys. Details of these

are provided in the case study section below.

For our international company investments, M&G

conducted a thematic review of the impact of a

company’s country of incorporation and listing

to understand the risks that these can present to

corporate governance. This study was prompted by the

fact that one of M&G’s active international holdings

does not have an Annual General Meeting – one of

the most basic elements of corporate governance. The

conclusion is that, where companies are incorporated

in either Bermuda, British Virgin Islands or the Cayman

Islands and are listed as Foreign Private Issuers on

either NASDAQ or the NYSE, shareholders should

be aware of the limitations in protection afforded to

shareholders, in areas such as voting on the re-election

of directors or pre-emption rights with regard to issuing

new shares.

Case studies of strategy engagement with companies

Royal Dutch ShellAll M&G funds voted against the proposals to acquire

oil and gas rival BG Group, with one exception. This

was because during a protracted takeover process the

oil price fell sharply and the Board did not take the

opportunity to renegotiate the original terms in the

light of this. The exception was where we abstained in

respect of one client mandate with a greater economic

interest in BG Group.

Examples of board changes

The Restaurant Group We arranged an early meeting with the new chairman

of this UK-listed restaurant business. Our aim was to

understand better the abrupt reversal in trading over

the course of 2016 and what impact this may have on

the company’s future strategy.

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Intrum JustitiaThe board of Intrum Justitia, the Swedish credit

management services business, recently dismissed

its chief executive. We followed up by speaking to the

chairman to understand more about the decision –

this was not wholly successful. We subsequently had

a meeting with the new chief executive, which was

more reassuring in terms of confirming the future

strategy, but not in explaining the events that led to

his predecessor’s dismissal. We will continue to monitor

the company closely.

Avery Dennison We contacted the senior independent director of Avery

Dennison, the global packaging trends company, to

understand the succession planning for the retiring

chief executive. We had concerns regarding the

appointment process. Of the three-person short-list,

two had left the company and the board subsequently

appointed the chief financial officer to the role. We

will continue to monitor the company closely.

Case studies of corporate governance engagement

BKWWe spoke to the Head of Group Management and

Corporate Steering at BKW, the international energy

and infrastructure business, with regard to the

company’s relationship with its 52% shareholder, The

Canton of Berne. We were reassured to hear that

The Canton now views its stake purely as a financial

investment and is no longer attempting to influence

the management to serve any political aim.

AVXWe contacted the chief financial officer of AVX, the

US manufacturer of electronic components, to discuss

the relationship with its key shareholder, the Japanese

corporation Kyocera, which has been a 75% shareholder

since 1995. The CFO was broadly supportive of the

structure, controls and lack of interference from

Kyocera – there is a Special Advisory Committee that

oversees the relationship. Perhaps surprisingly, Kyocera

has not tried to integrate the business and there are

no Japanese operational managers, which perhaps

explains why the relationship has been so successful.

HollySys HollySys is a Chinese company, listed on NASDAQ, that

manufactures automation and control systems for

engineering works relating to railways and other types

of infrastructure. M&G met with the chief executive to

highlight our concerns that, while corporate governance

standards are acceptable in a number of areas (for

example it has a robust set of independent directors),

in other areas there is a worrying lack of shareholder

protection. Most notably, the company does not hold

an Annual General Meeting for shareholders, it has

no director elections and on issues of new shares

there are no pre-emption rights for shareholders. The

company appeared happy to hear our suggestions and

the board will discuss these issues at its next meeting.

M&G subsequently wrote to the chief executive and

the board reiterating our views and concerns.

LufthansaLufthansa has suffered a series of employee strikes as

the company tries to reduce cost and compete with

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low-cost airlines. Lufthansa is required under German

law to have half its supervisory board made up of

employee representatives. Our discussion with the

chairman focused on the impact this has had on how

the supervisory board functions.

CESCWe met with an independent director and covered

issues including ‘overboarding’ in India (the director

used to be on 20 different boards), the peculiarly

Indian cultural challenges of asking an 88 year-old to

step down from the board and our concern over the

decision to invest in an Indian Premier League cricket

team. We have subsequently highlighted our concerns

more widely by speaking to the main shareholder (53%

stake), meeting with the chief executive and chief

financial officer and writing to the entire board.

Columbia Sportswear The company has an unusually strong board that

includes one of the founders of Nike and the chairman

of Intel. It was noteworthy as a result of how conscious

these individuals were of their personal reputations

and therefore how advanced they were relative to

peers in the treatment of their supply chain.

Case studies of conflicts of interest

BaiduBaidu is a leading Chinese-language internet search

provider listed on NASDAQ in the US. The company

announced early in 2016 that it had received a

proposal from the Baidu chairman and chief executive,

together with the chief executive of Chinese online

video platform iQiyi, to purchase Baidu’s stake in iQiyi.

M&G was concerned that this was not in the interest

of all shareholders due to the possibility that it could

distract the chief executive away from Baidu and lead

to potential conflicts of interest in the future, as well as

a lack of transparency on how the proposed purchase

price was determined.

Baidu’s non-executives formed a special committee

to consider the proposal, and M&G wrote to the

committee highlighting our concerns. We then met

with Baidu’s chief financial officer and, again, raised

our concerns. We subsequently contacted other

shareholders and the Asian Corporate Governance

Association to highlight the issue, and suggested that

they also contact the company.

Baidu subsequently announced in July that the

proposal had been withdrawn. We believe this reflects

well on the special committee and the company’s

approach to external shareholders.

Remuneration

During the course of 2016, executive pay has, once

again, attracted significant attention, with the

debate focused on the complexity of arrangements,

the quantum available and the amounts delivered to

executives (in particular where company performance

has been poor).

In July 2016, the Executive Remuneration Working

Group (an independent working group established by

the Investment Association) published its final report

on pay with recommendations/suggestions on how

to address the current failings of executive pay. M&G

participated in the process at the consultation phase.

The report identified 10 recommendations focused

on increasing flexibility, strengthening remuneration

committees and their accountability, improving

shareholder engagement, increasing transparency and

addressing the level of pay (although the report makes

no recommendations as to what is an appropriate

absolute level).

The working group called on shareholders to act

collectively to pursue more innovative schemes. The

report also recognised that Long-Term Incentive Plans

(LTIPs) are potentially inflationary, and a plan with a

shorter time frame of performance measurement –

and therefore lower risk on outcomes – could provide

an opportunity to reduce overall pay potential.

We are beginning to see companies referring to this

report in their consultations, with a small number

of companies testing the water on new incentive

arrangements that are different from the standard

structure (predominantly looking at amalgamating

the annual bonus with long-term incentives).

In addition, executive pay and the ability of shareholders

to hold companies to account on this issue has formed

a key part of the UK Government’s consultation on

improvements to corporate governance.

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Engagement with companies on remunerationDuring the course of 2016, we engaged directly with

the Remuneration Committee chairs of 114 FTSE 350

companies. Alongside this, for smaller holdings, we

provided input into consultations on remuneration

via the Investment Association. Matters discussed

included revisions to the company’s remuneration

policies, arrangements for departing and joining

executives, remuneration outcomes and the

performance metrics attached to incentive plans. The

level of consultation on remuneration-related issues

has grown substantially during the course of 2016,

in particular in Q3 and Q4. A significant number of

these will be voted on during the course of 2017 as

companies renew their remuneration policies.

Voting on remuneration-related resolutions2016 started off quietly and there were no significantly

contentious votes on remuneration during the first

quarter. In the second quarter, the main voting

season, we saw a significant increase in the number

of remuneration-related issues that we either opposed

or were dissatisfied with. As a result, the number of

remuneration-related resolutions we voted against

or abstained on increased (12 voted against and

15 abstained).

In Q3 we abstained on seven remuneration-related

resolutions at company general meetings (Babcock,

Alstom, BSD Crown, Great Eastern Energy, Iomart, McLeod

Russell India and N Brown) and opposed four (Dixons

Carphone, Ryanair, Source Bioscience and Super Valu). In

Q4 we abstained on Aviation and voted against Esure.

The decision to either vote against or abstain is

determined by the Corporate Finance and Stewardship

team, in conjunction with the relevant investment team

and we endeavour to communicate our rationale for

voting against to the company involved.

The range of issues triggering a vote against or an

abstention included:

• excessive or unjustified increases in quantum;

• inappropriate use of discretion by the Remuneration

Committee;

• poor disclosure (in particular where bonus payments

were at or near maximum);

• lack of consultation on material increases; and

• inappropriate adjustments to performance metrics.

Case studies of remuneration engagement

Ophir Energy Ophir Energy consulted on an LTIP structure that

moved away from annual awards to awards triggered

by net asset value (NAV) events, with participation

proposed for all employees (in combination with a

significant reduction in annual bonus potentials). The

revised structure supported key organisational change

and focused employees on value creation and capital

allocation. Despite diverging from current UK market

practice, we were supportive of it. In our view, it fits with

the strategy and culture of Ophir. Our engagement with

the company looked at understanding the company’s

motivation for proposing the revised scheme, ensuring

the basis on which NAV is measured is appropriate

and challenging the proposal to implement the revised

structure on a company-wide basis.

Weir Group Weir Group proposed an award of ‘restricted shares’,

which were not subject to performance conditions, with

vesting only subject to ongoing employment. Executives

currently participate in a traditional LTIP structure

and the annual awards made under the LTIP would be

reduced to reflect the introduction of restricted share

awards. Given the cyclical nature of Weir’s business,

setting meaningful performance metrics over the long-

term horizon has proved difficult. The revised policy was

intended to address the ongoing need to retain executives

despite this, and we were supportive. The proposal had

an appropriate reduction in the face value of the award

(50%), given the certainty of restricted shares, and an

extension to the vesting timeframe for restricted shares

from three to five years. At the AGM, 72% of shareholders

voted against this remuneration policy. We anticipate

further discussions with Weir during the course of 2017.

BabcockIn January 2016, Babcock announced the retirement

of its chief executive, following a 13-year tenure, over

which period the share price rose from 98p to 1080p

(representing a CAGR of 19% per annum). On retirement,

the Remuneration Committee exercised its discretion

in favour of the chief executive, allowing him to retain

in full his outstanding long-term incentive awards

(subject to the achievement of existing performance

measures). In such instances, there is an expectation

that outstanding awards are pro-rated from the point of

award to the point of departure, with vesting of retained

awards subject to ongoing performance criteria.

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We raised a number of points with the company

relating to the timing and quality of disclosure on

remuneration discussions and our expectation that

time pro-ration should be applied to outstanding long-

term incentive awards for the chief executive.

Rather than following our voting guidelines and

voting against, we abstained on the remuneration

report in recognition of the significant value that

the chief executive has delivered to our clients over

the long period in which we have been invested in

Babcock shares. The remuneration report was only just

approved (with 52% of shareholders voting in favour

and 48% voting against or abstaining).

Chegg Chegg is a US online education platform listed on

the New York Stock Exchange. M&G spoke with the

finance director to discuss a number of concerns we

have on Chegg’s remuneration policy. We primarily

discussed the magnitude of the annual 8-9% potential

dilution to the existing shareholders from incentive

grants to employees. The company floated in 2013

and unfortunately the share price has performed

poorly. The vast majority of staff incentives, both pre

and post IPO, are now ‘under water’ and the company

predictably pointed to the remuneration competition

in Silicon Valley as being a concern for retaining staff,

hence the large grants. Chegg hopes to move toward

a lower dilution rate in the medium term. We are

somewhat comforted by this fact.

BPBP’s chief executive received US$19.6m in a year when

revenue was down 37%, a pre-tax loss of US$9.5bn

was reported (vs US$5.0bn and US$30.2bn profit for

2014 and 2013, respectively) and total shareholder

return was down 7.8% in the year, and flat over a

seven-year period when the FTSE 100 was up 90%.

M&G was not consulted prior to the release of the

remuneration report, which we voted against at the

Annual General Meeting (around 60% of shareholders

voted against). BP will be seeking shareholder approval

for its remuneration policy in 2017, and a consultation

with M&G and other major shareholders is under way.

WPP During the course of the 2015/16 financial year, WPP’s

chief executive received £68m from share-based

incentives relating to vesting deferred awards and

LTIPs. M&G voted against the remuneration report

on the basis that it was an excessive amount (around

33% of shareholders voted against).

Social and environmental

During the course of 2016, our engagement with

companies on specific social and environmental issues

has continued alongside a wide range of activities

linked to policy development in these areas.

Examples of engagement

BHP BillitonFollowing the tailings dam disaster at BHP Billiton

and Vale’s joint venture in Brazil, which left a number

of people dead and caused substantial environmental

damage, we have engaged with BHP Billiton to

evaluate its response and to monitor ongoing

developments. We have also followed up with several

other mining holdings to ensure that cost-cutting

measures are not negatively affecting operational

safety standards.

Barrick GoldWe had a discussion with the chief sustainability officer

at Barrick Gold, the world’s largest gold company

by production, who provided an update on ongoing

developments in a number of ESG-related areas:

safety trends, employee and community relations

and the environmental management of issues such as

pollution and water. Barrick is a UN Global Compact

signatory but has faced strong criticism over soil and

water pollution at the Pascua Lama gold mine on the

Chile/Argentina border. The mine has been suspended

since 2014, but it appears to be nearing a resolution

with the Chilean authorities.

Barrick has been considered weak on ESG issues

historically and has been involved in high-profile

controversies at a number of its mines. This seems to

be changing, with transparency, in particular, an area

it wants to lead on. Barrick is working with the ICMM

(a sustainability-focused mining industry association)

and recently released a ‘transparency hub’ on its

website. This highlights tax payments to the different

countries in which it operates, as part of the Extractive

Industries Transparency Initiative, but also gives

granular details on mine-by-mine ESG/sustainability

metrics (eg,  mining industry injury rates, water

usage/intensity, greenhouse gas and toxic emissions).

20

We consider this to be a good example for others to

follow on sustainability reporting.

ESG engagement with other mining companiesWe continued to raise ESG-related issues with the

management of a range of global mining companies,

including BHP Billiton, Rio Tinto and Hochschild Mining,

focusing on a range of ESG issues, in particular mine-site

safety, community relations and environmental impacts.

Aiming for A‘Aiming for A’ (an investor group pushing for greater

disclosure). We continued to support resolutions

encouraging improved disclosure of climate change-

related risks facing companies in the oil and gas and

mining sectors.

Hyundai Motors and Kia MotorsWe held separate meetings with South Korea’s two

leading auto manufacturers, Hyundai and Kia, which

are part of the same family-run business conglomerate

(or ‘chaebol’ as they are known in South Korea). Both

meetings focused on the impact of technological

developments in the auto industry. We discussed

the challenges and opportunities posed by new

technologies such as autonomous vehicles and ‘green

cars’ (hybrid/electric vehicles/fuel cells). It is crucial for

companies to keep up with the accelerating pace of

developments here.

Our impression is that Hyundai is sharpening its focus

on this area, with an intention to be number two in

green cars by 2020. Kia were the first auto manufacturer

to put a fuel cell-powered vehicle into commercial

production, but it has some way to go to catch up with

the industry leaders. From a governance perspective,

both are taking a more shareholder-friendly approach

to capital allocation and are looking to increase

the dividend pay-out ratio. However, developments

can move at a slow pace in Korea and we still have

concerns around the composition of the board and

shareholder access to senior management, areas we

will continue to engage on. Both companies have set

up new corporate governance-focused committees

tasked with addressing shareholders’ rising demands

around governance and transparency. We see this as

an encouraging development.

M&G’s Select team ESG engagements The Corporate Finance and Stewardship team worked

closely with M&G’s Select investment team during the

year to support the team’s integrated ESG approach,

with a focus on company ESG engagement. We

jointly conducted calls and meetings with a number

of companies covering a range of different ESG issues

that we considered to be material to the companies’

sustainable success. These included British American

Tobacco (covering regulatory developments, bribery

and corruption, biodiversity), Nestlé (supply chain risks,

responsible sourcing), Stericycle (waste management,

pollution, operational health and safety), L Brands

(supply chain management, responsible sourcing,

environmental management, and broader

reputational risks) and Reckitt Benckiser (product

liability and litigation issues in South Korea). These

discussions are designed to assess the ESG risks faced

by these companies and to derive insights from how

management are dealing with these risks.

Wider ESG activity

We attended a number of investor forums and

conferences covering a range of ESG-related topics,

as  part of our participation in the fast-developing

area of responsible investment. These included

Salter Baxter’s Sustainable Business Forum, Goldman

Sachs’ Low Carbon Forum, RI Europe, Europe’s

leading Responsible Investment conference, an

event organised by Impactt focusing on supply-chain

worker conditions in Asia, and a Guardian-sponsored

21

discussion on worker conditions in the fishing industry.

These discussions are valuable in enabling us to remain

on top of developing trends and legislation in this

area, but also enable us to participate in the debate

on topics that are of relevance to us as investors, and

also of growing interest to our clients.

Salter Baxter’s annual Sustainable Business ForumWe attended the annual event in Amsterdam hosted

by Salter Baxter, the UK-based sustainability consultant

which works with a range of corporates on sustainability.

The event was primarily for corporates looking to

develop their strategies; we were the only investors there.

This gave it a different perspective from some of the

other ESG/SRI-focused conferences we have attended.

Companies presenting were Covestro (material science

business spun out of Bayer, involved in a number of

sustainability themed technologies, eg, insulation,

super-lightweight aviation materials); Novozymes

(enzymes business with a plethora of sustainability-

focused applications; sustainability is so embedded in its

philosophy that the chief executive recently stated that

the company no longer has a separate sustainability

strategy); Xeros (patented cleaning and tanning

processes that minimise water usage and waste); ING

(which talked about sustainability trends and regulations

in finance); Heineken (which focused on its responsible

drinking advertising campaigns). It was interesting to

hear how fast sustainability is moving up the agenda

for companies across all sectors. It was also interesting

to hear how many of the businesses are using the

Sustainable Development Goals to provide a framework

and structure to their strategies. The event coincided

with the recent release of Lord Browne’s book ‘Connect’3,

and co-author Robin Nuttall discussed the book’s thesis

that business is increasingly disconnected from society

and needs to “radically re-engage”.

ImpacttWe participated in an ESG discussion hosted by supply-

chain specialist Impactt, which works with factories,

suppliers and brands to implement management

techniques to encourage improved working conditions

across Asia. The discussion focused on measures

implanted to improve factory standards in Vietnam,

India, Bangladesh, and how improvements in working

conditions have obvious social benefits but can also

lead to advances in factory productivity, product

quality as well as helping companies manage ethical/

reputational risks in their supply chain.

Panel discussion on working conditions in the fishing industryM&G attended a broad-ranging discussion hosted by

the Guardian on the topic of forced labour in the fishing

industry supply chain, which was the subject of a

major investigation by the newspaper earlier this year.

It was an interesting but troubling debate between

four industry experts (a large global fish supplier,

a human rights lawyer, an NGO and a responsible

fishing industry trade body) looking to shed light on

the issue and work towards solutions. The discussion

touched on fishing industries in a number of supplier

countries but focused primarily on Thailand, one of

the biggest suppliers to food companies and retailers,

where forced labour, human trafficking and inhumane

working conditions are allegedly commonplace.

While a number of admirable initiatives have been

set up, the migrant and undocumented nature of the

workforce can make improvement mechanisms – such

as monitoring and auditing inherently problematic.

One of the key takeaways was that governments,

the fishing industry and investors all need to share

responsibility for addressing this issue. M&G has taken

an action point to follow up directly with companies

exposed to this issue and continue this discussion

further with certain members of the panel.

Goldman Sachs Low Carbon ForumWe attended the Low Carbon Forum hosted by

Goldman Sachs in London, where participants (chief

executives, investors, policy-makers, and carbon/

climate experts) discussed trends shaping the low-

carbon economy. The discussion focused on three

primary themes: low-carbon technologies (eg, electric

vehicles and battery storage); developing markets

and business models (eg, autos, utilities, lighting);

and the challenges investors face in a volatile global

policy landscape. The potential impact on US (and

global) policy of Donald Trump’s election was a

recurring topic. While most expressed a high degree of

uncertainty about the policy and regulatory influence

of the incoming Trump administration, there was a

strong consensus that the trajectory towards a low-

carbon economy was structural and would remain in

place. Support will come from economics (job creation,

increasingly attractive pricing versus traditional

sources) and technological advances.

3 ‘Connect: How companies succeed by engaging radically with society’,

John Browne, Robin Nuttall, Tommy Stadlen, WH Allen, 2015.

22

In the US, the Clean Power Plan faces challenges

(Trump has committed to dismantle it), but key existing

legislations have received bi-partisan support so will

likely remain in place, while much of the policy around

climate change is at the state rather than the federal

level, hence less likely to be affected. Outside the US, two

speakers highlighted the reasonably consistent global

consensus, with India and UAE emphasising their strong

commitment to developing low-carbon infrastructure.

In terms of developing technologies, electric vehicles

were a very hot topic but still in early stages versus some

of the other technologies. Wind and solar technologies

continue to build scale rapidly and LEDs have achieved

penetration levels in one of the fastest technological

adoptions in human history. The final but crucial piece in

the jigsaw – battery/storage technology – is developing

at a fast pace. Lithium is one of the key components of

the electrification trend and Albemarle, one of the main

lithium producers, said it could keep up with demand if

growth remained at levels of 2-3% but not much more,

highlighting one of the economic challenges to the rapid

uptake of the existing electric vehicle technology (ie, the

risk of insurmountable lithium supply constraints).

UN Principles for Responsible Investment Annual UNPRI assessmentM&G received the assessment of our second annual

submission detailing our Responsible Investment

activities. This assessment rates both M&G as a whole

and the individual asset classes in which we invest.

All modules either maintained or improved on their

scores from last year.

The Strategy & Governance module (measuring M&G

as a whole) maintained the highest ‘A+’ rating. All

other modules achieved an ‘A’ rating (an improvement

for Equities) except for Fixed Income – Securitisation,

which achieved a ‘B’ (compared to the median score of

‘E’ for this module).

We are conducting an internal review to incorporate

lessons from the reporting and assessment process, and

to ensure a consistently strong score going forward.

UNPRI Consultation on Sustainable Financial SystemM&G participated in a consultation coordinated

by the UNPRI to evaluate signatories’ views on the

organisation’s remit and purpose 10 years after its

launch. Specifically, signatories were asked to consider

whether the existing Principles remain appropriate or

need updating; to assess the risks that the organisation

should be focusing on in its ongoing work; and how

to better measure the impact that signatories’

Responsible Investment activities can have on the

environment and society as a whole.

Our response aimed to demonstrate our willing

support of the PRI as an initiative and many areas of

its work, but pushed back on certain developments

that would either be impracticable for signatories or

the UNPRI to implement. Following the consultation,

the PRI released a paper that highlights the issues/

concerns likely to inform the PRI’s work in the coming

years, which is also a valuable synopsis of the risks that

could undermine the resilience/sustainability of the

financial system.

UN Global CompactThe UN Global Compact is an initiative that promotes

good corporate practices across human rights, labour

rights, bribery and corruption and the environment.

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ESG service provider ISS-Ethix compiles a ‘red list’ of

companies assessed to be in breach of these principles;

this list is monitored and used as an ESG engagement

tool for most of M&G’s equities funds, while an

exclusion list is in place for M&G’s Select team. During

2016, we continued our ongoing engagement with

flagged companies to understand their position

and to encourage them, where appropriate, to

address the issues: dialogue with Royal Dutch Shell

at the company’s SRI day covering issues related to

environmental impact in Nigeria and worker conditions

in Brazil; discussion with the Brazilian conglomerate

Cosan to assess the company’s response to concerns

about worker conditions at a sugar plantation;

discussion with Dongfeng Motor over concerns about

military supplies to the Chinese government. A number

of these and other discussions remain ongoing and we

continue to monitor the relevant issues.

Meetings with European Responsible Investment ForumsWe held meetings with the heads of the UK and French

Social Investment Forums (SIFs), UKSIF (UK) and FIR

(France). These bodies bring together responsible

investors in a collaborative grouping and play a

role in developing responsible investment in their

respective countries.

UKSIFThe discussion with the UKSIF provided us with

an update on the organisation's current work and

future priorities. Key areas of focus include: fiduciary

duty (UKSIF played an active role in the Pensions

Regulator recently changing the guidance on whether

ESG should be considered by pension trustees); non-

financial reporting (BIS and EU consultations into this

issue are ongoing, and the FSB’s task force for climate

change disclosure); ESG rating agencies (UKSIF is

considering implications of recent developments

involving Morningstar, MSCI and S&P). M&G is actively

considering membership.

FIRThe discussion with the French SIF provided an

update on the organisation's work and an overview

of investment and legislative trends in the French

market. France is one of the more advanced markets

from an SRI perspective, with ‘best in class’ being

the dominant ESG strategy; focus is now shifting

from risk management to positive impact. On the

regulatory side, last year's addition of Article 173 to

the existing Law for Energy Transition strengthens

mandatory disclosure requirements for France-listed

companies and introduced a ‘comply or explain’

approach for French institutional investors to disclose

how they integrate climate and other risks in their

investment approaches.

Investor-corporate discussion on SRI/ESG researchM&G attended an informal discussion hosted by

SRI Connect (an SRI website), which focused on

how to address SRI/ESG communications within the

corporate-investor chain. The discussion involved many

UK companies and SRI focused investors and looked

at how to improve the provision and quality of ESG/SRI

data and analysis between these two groups. Mining

and oil and gas companies were well represented, but

companies from a range of other sectors (including

aerospace and defence, beverages, banks and services)

also participated. The discussions centred on the

strengths and weaknesses of the ESG research process,

the wider investor–company communications process

on sustainability, and sought to identify potential

improvements to both areas. It gave M&G and other

responsible investors a great opportunity to have an

open debate about how to move things forward in

this crucial area. One of the most widely supported

calls was for companies to produce more relevant –

rather than simply more – information on ESG and

sustainability issues.

Voting

We see voting as an integral part of our role as active

asset managers in holding company’s boards to account.

The key areas of interest during 2016 are outlined below.

UK and IrelandThe UK strives to maintain high standards of corporate

governance. The boardroom landscape has changed

dramatically for the better since the Cadbury report

in 1992, resulting today in broad consensus of how

boards should be structured, how they should function

and how they should communicate with shareholders.

The Greenbury report, published three years later to

address concerns over directors' remuneration, also

resulted in significant change. But after two decades,

the central questions of how directors should be paid,

and how much, still remains.

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BP and Smith & Nephew were the most high-profile

companies that failed to gain shareholders' support

on remuneration matters, but many other companies

also faced significant shareholder discontent. General

unease at the level of directors’ pay packages was

reflected in Theresa May’s speech that launched her

Conservative Party leadership campaign. Following

May's success in becoming prime minister, the

Government has published a Green Paper on corporate

governance with the spotlight on remuneration. It

contains suggestions including the publication of pay

ratios to strengthening shareholder voting power.

Earlier in the year, the Executive Remuneration Working

Group formed “as an independent panel to address the

concern that executive remuneration has become too

complex and is not fulfilling its purpose.”4 Its report was

published in July and was welcomed in a statement

by the Institute of Directors, which opined that “the

current approach to executive remuneration is failing.”5

The first of the report’s ten recommendations is

that: “There should be more flexibility afforded to

remuneration committees to choose a remuneration

structure which is most appropriate for the company’s

strategy and business needs.”6 In this context, it should

be noted that M&G had extensive discussions with Weir

Group regarding its proposal to adopt a restricted share

plan (see page 18 of this report). Given the volatility

of market conditions, we felt that the plan had merit

but the scheme was not supported by the majority

of shareholders.

North America

Proxy accessThe salient feature of the US proxy voting in 2016

was the record number of proxy access (ie, the right

of shareholders to nominate candidates as directors)

proposals submitted by shareholders. According to

Institutional Shareholder Services (ISS), a provider

of corporate governance and responsible investment

solutions, “more than 36% of S&P 500 companies

now have proxy access rules in place.” However, where

companies have proposed proxy access resolutions,

there are usually restrictions on the number of

shareholders that may be included as nominators,

and we expect these companies to face shareholder

resolutions proposing to remove such restrictions. We

were supportive of such resolutions during the year.

During the year we decided to change our stance on

proxy access so that we now support proposals with a

3% shareholding hurdle rather the 5% (which remains

our general position for UK shareholder resolutions),

reflecting the standard proposed by the Securities

and Exchange Commission.

Corporate governance‘The Commonsense Corporate Governance Principles’,

devised under the leadership of Jamie Dimon, President,

Chairman and Chief Executive Officer of JPMorgan

Chase and supported by well-known investor Warren

Buffet and Chairman and Chief Executive Officer of

BlackRock, Larry Fink, among others, were published

in July. It is disappointing that the statement makes

no attempt at establishing standards or providing

guidance. Our focus has continued to be on board

structure and director independence and we have

adopted a stronger voting stance in relation to long

director tenures. In this area, the statement says little

more than common sense.

Remuneration‘Say on Pay’ is voluntary in Canada and continues to

be  adopted. According to ISS, approximately 58% of

S&P/TSX Composite Index companies offered the

chance for shareholders to vote on remuneration.

Looking to 2017, we will see the introduction of pay-

ratio disclosure, something which is under debate in the

UK. Donald Trump’s presidency in the US may start to

be felt. The Council of Institutional Investors recently

expressed its fear that legislation changes could have

a huge impact on proxy advisory firms and potentially

reduce shareholder ability to hold boards to account.

Europe

BrexitThe EU membership referendum outcome in the UK

may have implications for shareholders in European

companies. The UK has been very vocal in pushing

for shareholder rights, which is particularly important

4 Source: www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202016.pdf5 Source: Executive Remuneration Working Group Final Report (July 2016).6 Source: www.theinvestmentassociation.org/assets/files/press/2016/ERWG%20Final%20Report%20July%202016.pdf

25

in markets often characterised by dominant family

or state shareholders. The EU's Shareholder Rights

Directive, which would have provided for binding votes

on remuneration amongst other things, seems to

have stalled.

One share, one voteShare structures that gave some shareholders greater

voting power remains an area of concern. France

and Italy now allow loyalty shares that provide

double voting power to shareholders who have held

shares for two years. France’s ‘Florange Law’, which

automatically grants double voting rights, caused

tensions with companies and shareholders looking

to restore one share, one vote. Other countries,

particularly in Northern Europe, have capital structures

with differential voting rights across share classes.

Gender diversityBoard gender diversity is moving up the agenda across

Europe. As a result of the Copé-Zimmermann Act,

2017  will see the largest French companies having

boards comprising at least 40% women by the time of

their respective Annual General Meetings. According

to ISS, the average percentage of female directors

rose to 38.61% in 2016.

The Netherlands announced a requirement for boards

to comprise 20% women by 2019. Belgium, Norway,

Spain and Italy already have gender-diversity quotas.

The latest edition of the Finnish Corporate Governance

Code requires companies to establish principles around

diversity and make related disclosures.

RemunerationRemuneration remains a hot topic across Europe. In

France, new legislation in the form of anti-corruption

law Sapin 2 looks likely to introduce two binding votes

on remuneration, an annual vote on policy and an

annual vote on variable and exceptional remuneration.

They are likely to affect shareholder meetings in 2017

and 2018, respectively.

In Germany, shareholders’ ability to hold boards to

account on remuneration remains limited, with only

about a quarter of DAX 30 companies offering the

advisory vote. ISS reports that between 2014 and

2016, the average approval rates for these resolutions

decreased from 96% in 2014 to 92% in 2015, and to

76.2% in 2016.

Corporate governance The biggest change in European corporate governance

structure occurred in Norway where large companies

are no longer obliged to have a Committee of

Representatives or a Control Committee. Companies

may choose to replace them with a ‘corporate

assembly’ or just adopt a structure that has the board

directly accountable to shareholders.

At the beginning of 2016, the Finnish Corporate

Governance Code was updated with, as noted above,

requirements around diversity and guidance that

director independence is impaired after 10 years. In

the Netherlands, The Dutch Corporate Governance

Code Monitoring Committee recently updated the

Netherlands Corporate Governance Code with long-

term value creation as its focus.

European companies often have controlling

shareholders and where this is the case we look closely

at board independence. Where this is inadequate, we

will look to vote against those non-executive directors

that are the least independent. One example is Spain’s

Abertis Infraestructuras S.A. where, in our view, only

five of the 12 non-executives are independent and we

decided to oppose the re-election of two of the non-

independent directors.

AsiaWithin the Asia Pacific region we saw a number of

continuing positive trends, particularly with respect to

the representation of independent directors:

• In Hong Kong, the number of companies with at

least one-third independent directors (one of the

listing rules implemented in 2012) reached an

all-time high of 97.8%. In Singapore, they are at

100% and are also seeing growing a number of

independent chairs, up from 28% in 2014 to 32%

in 2016.

• In Taiwan, the introduction of a minimum number

of independent directors to company boards in

2013 continues to have a positive impact, with 89%

of boards in 2016 having at least two independent

directors, up from 63% in 2014. However, the 2017

requirement of having at least 20% independent

directors remains lower than many other Asian

countries (ie, Hong Kong, Singapore and China are

at 33%).

26

• In Japan we saw fairly dramatic improvements

in a number of areas as a result of the Corporate

Governance Code that was introduced in June

2015. This Code encourages companies to appoint

at least two independent outside directors. The

percentage of companies with at least two outside

directors increased from 55% in 2015 to 80% in

2016. We will look to vote against boards that do

not meet this criteria.

• At the end of August, the listing advisory committee

of Singapore’s stock exchange recommended

allowing companies to list with a dual-class share

structure. We see this as a concerning development,

since, in our view, corporate equity structures should

consist only of one class of shares with equivalent

rights, a view broadly shared by other long-term

investors. We will continue to monitor implications

for our investments listed in Singapore.

However not all the moves were positive:

• In Hong Kong, whilst there is a growing number

of companies with nomination committees, a

worrying trend is the falling frequency with which

the chairman of this committee is filled by a non-

independent director (down from 52.8% in 2014 to

45% in 2016).

• We remain frustrated by a number of practices in

these markets, including

– In Hong Kong, the ability to issue 20% of the equity

without pre-emption rights;

– In Singapore, the practice of granting incentive

options with an exercise price at a discount to the

market price of their shares.

Latin AmericaIn Latin America, the increasing election of

minority board representatives is changing the

governance landscape, with Brazil and Chile seeing

continued momentum. In addition, in Brazil we saw

minority shareholders elect a significant number of

representatives on to companies' board of directors

and a number of contested director elections.

There is also in Brazil ongoing frustration with the

number of companies using a legal injunction to

prevent the disclosure of important elements of their

directors’ remuneration.

Voting outcomes for 2016In 2016 we voted at 1,536 meetings – 780 were for UK-

listed companies and 756 for international companies.

Details of our voting is available on the M&G website

and from Q3 the rationale for voting against resolutions

was also made available.

Our starting position is to be supportive of the

management of the companies in which we invest.

However, there are occasions when company boards

put forward resolutions for shareholders to vote

on at a general meeting that we feel unable to

support because we do not believe them to be in the

shareholders’ best interests. Our approach to voting

is described in our voting policy which is available on

M&G’s website.

In Figure 1 we show the total number of meetings

at which we voted and the number of meetings

where we did not support at least one resolution, by

geography. In Table 1 we show the instances where

we did not support management proposals, by type

of issue and geography.

Figure 1. Total number of meetings at which M&G voted

NorthAmerica

EuropeUK0

200

400

600

1000

800

1200

1400

1600

Rest of World

WorldAsia Pacific

Japan

Number of meetings

Number of meetings with at least 1 vote against, withhold or abstain

27

Table 1: Votes cast as ‘Against’, ‘Abstain’ or ‘Withhold’ by issue category and region.

UK votes against management were predominantly

related to capital structures. Votes against or

abstentions on remuneration-related resolutions were

typically a result of:

• excessive or unjustified increases in quantum;

• inappropriate use of discretion by the Remuneration

Committee;

• poor disclosure (in particular where bonus payments

were at or near maximum);

• lack of consultation on material increases; or

• inappropriate adjustments to performance metrics.

International votes against management fell primarily

into the following categories:

• excessive or poorly structured remuneration policies

and/or share-option plans (eg, Compagnie des Alpes,

Hyperdynamics, Sands China);

• underperforming, ‘overboarded’ or bundled director

elections (eg, Asahi Glass, CAC holdings, Compagnie

des Alpes, Hyperdynamics, Kirin Holdings, Turkcell);

• excessive equity issuance without pre-emption rights

(eg, DSV, Metro, State Bank Of India, Compagnie

des Alpes).

Voting by region

UK• The majority of our UK votes against shareholder

resolutions are related to share-issuance

authorities that disapply pre-emption rights over

more than 5% of the issued share capital. We are

pleased to report that companies seeking such

authorities (typically up to 10%) are increasingly

separating the resolutions authorising the request

into two resolutions of 5% each, allowing us to

support authorities up to the first 5%. For smaller

companies, we will support the disapplication

of pre-emption rights up to 10% of a company’s

share capital.

US• The US is conspicuous for the number of

shareholder resolutions put forward for

shareholder consideration. These cover a range

of issues, and we consider each on its merits.

The standout proxy voting issue during 2016 has

been proxy access. One of the areas of focus for

us has been, and will undoubtedly continue to be,

board independence, in particular voting against

directors with long tenures.

Europe• Europe as a region comprises a large number of

countries, each with its own market characteristics.

However, remuneration as an issue continues to

attract much attention across all markets, though

the ability of shareholders to hold companies to

account through voting varies greatly. Looking at

the dissenting votes that we cast, some 26% related

to remuneration. Our concerns were registered

against a range issues including disclosure, structure

and use of discretion. Share issuance is a particular

area of concern for us and we often voted against

resolutions seeking authorities greater than 10%.

UK EuropeNorth

America JapanAsia

PacificRest of World Total

Directors-related 9% 18% 29% 78% 31% 36% 25%

Remuneration 16% 26% 20% 6% 19% 32% 19%

Capital-related 70% 31% 1% 0% 40% 0% 36%

Corporate activity 3% 1% 1% 1% 2% 0% 2%

Anti-takeover 1% 5% 0% 8% 0% 0% 2%

Routine other business 2% 17% 2% 1% 8% 14% 6%

Shareholder resolutions 0% 1% 47% 7% 0% 18% 10%

100% 100% 100% 100% 100% 100% 100%

28

Asia Pacific• Share issuance is also a concern in this region as

companies often seek authorities greater than 10%,

which we typically oppose. Opportunities to vote

on director remuneration across the Asia Pacific

region are limited and so represent a relatively

small proportion of our unsupportive voting. Capital

management resolutions are more prevalent and

often breach our 10% voting guideline.

• Capital management in Japan has been identified

as a concern for a different reason. The Ministry

of Economy, Trade and Industry’s review in 2015

pointed to the low levels of return on equity being

achieved by Japanese companies and recommended

targeting 8%. ISS subsequently initiated a voting

policy of holding executives to account when return

on equity is less than 5%. We have taken a similar

approach.

Case studies of meetings requisitioned by Shareholders

Speedy Hire Tosca is a 20% shareholder of Speedy Hire and

requisitioned a general meeting to table two

shareholder resolutions. Firstly, to propose the removal

of Jan Astrand (Executive Chairman) and secondly,

to propose the appointment of David Shearer as an

independent non-executive director.

Speedy Hire’s board published a detailed circular

rejecting these proposals. The circular chronicled

the extensive degree of contact that had occurred

between Tosca and the company in the 14-month

period between May 2015 and July 2016.

It was significant that Tosca owns 20% of UK tool and

equipment supplier HSS and Tosca was promoting a

merger between the two companies, which was not

in the best interest of all shareholders. Our approach

in such situations is to seek the views of all of the

interested parties in order to reach a balanced view

of what we think is in the best interests of our clients.

We had separate calls or meetings with each of Tosca,

Astrand, Shearer and Russell Down (chief executive

of Speedy Hire) and also a previous member of the

Speedy Hire board. As a result, we concluded that

M&G  would support the board and not require the

chairman to step down.

In the event, 64% of shareholders supported Astrand

to remain as chairman; however, 52% also voted in

favour of electing Shearer to the board. Astrand has

now reverted back to being a non-executive chairman.

On 30 September, the company announced a positive

trading update and stated that “full year profit before

tax will be ahead of its previous expectations”.

LakehouseThe company adjourned its General Meeting the

day before it was due to be held in April 2016, when

it became apparent that the requisitionists, led by

Mark Slater of Slater Investments and Steve Rawlings

(founder), would be successful in their proposed nominee

director appointments. Sean Birrane (Chief Executive

Officer) had already departed in March 2016, following

the profit warning in February 2016. Then, against

the board’s expectations, Stuart Black (Executive

Chairman)  also abruptly left at the end of April. We

had supported the board as we did not believe such a

degree of change at this juncture was appropriate.

Stock SpiritsThe company continues to suffer severe headwinds

in the Polish vodka market. Luis Amaral, a 10%

shareholder and majority owner of Eurocash (a major

customer), was successful in getting two nominee non-

executive directors appointed. Amaral made some

valid criticisms of the company. However, on balance,

we felt Stock Spirits deserved our support, given it had

already started making operational changes.

Engagement with other stakeholders

M&G is willing to act collectively with other UK and

overseas investors where it is in the interests of our clients

to do so. We are supportive of collaborative engagements

organised by representative bodies and others.

M&G is a member of the Investment Association

(IA), with M&G representatives actively participating

on a range of IA committees. We have committed to

participate in the Investor Forum, which was set up

to increase proactive collective engagement. We are

also a member of the Asian Corporate Governance

Association (ACGA), which provides an excellent forum

for collaboration.

In addition, members of the Corporate Finance and

Stewardship team participate on a range of external

29

formal and informal committees related to broader

shareholder issues.

A summary of collective and broader engagement

activities with wider stakeholders is provided below.

Life post Brexit for accounting and auditThe Financial Reporting Council (FRC) hosted a

meeting for investors and representatives from the

newly named government Department for Business,

Energy and Industrial Strategy (BEIS) to discuss

accounting matters in the immediate aftermath to

the EU referendum result. The conclusion from the

meeting was that post Brexit, investors would still like

companies to stick to the UK’s and EU’s perceived gold

standards of reporting, rather than let standards drop

(for instance, keep IFRS for AIM companies as opposed

to letting them revert back to UK GAAP).

Investment Association (IA)M&G is represented on both the Corporate Governance

and Engagement Committee and the Remuneration

& Share Schemes Committee. These typically meet

monthly and discuss topical issues such as recent

voting patterns, government policy changes and

improvements to the IPO process.

Productivity Action Plan In March 2016, the IA began work on its Productivity

Action Plan. The work was broken down into three

working groups, namely:

• Long Term Working Group;

• Capital Management Working Group;

• Intangible Reporting Working Group.

M&G was represented on each of the three groups.

Sustainable and Green Investment Working GroupM&G attended a discussion covering four main areas

of development.

Investor ForumThis was set up in 2014 to create an effective group

of shareholders to collectively engage with UK-listed

companies. It is aimed at larger companies where

individual shareholders may only have a small percentage

holding and would benefit from acting collectively.

Its purpose is to facilitate dialogue, create long-term

solutions and enhance value. In 2016, the Forum was

in contact with Cobham – an international company

engaged in development, delivery and support of

advanced aerospace and defence systems – post the

profit warning and rights issue, with a list of issues

collated from its members.

Another instance of collective action was when the

board of Sports Direct was persuaded to hold an

external review of its corporate governance.

All Party Parliamentary Corporate Governance Group (APPCGG)The APPCGG was formed in 2004 to develop and

enhance the understanding of corporate governance at

Westminster. The focus is on promoting the responsible

leadership of business so that the interest of shareholders

and other stakeholders are properly protected.

The group hosts a number of meetings in Westminster

for both MPs and members of the House of Lords,

asset managers and UK-listed companies in the FTSE

100. Speakers in 2016 included Andrew Bailey, Chief

Executive Officer of the FCA and Bill Winters, Chief

Executive Officer of Standard Chartered.

United Nations Principles for Responsible Investment (UNPRI)

UNPRI's 10-year anniversaryThe 10-year anniversary event focused on reviewing

the organisation’s achievements and assessing its

upcoming challenges and priorities. The proliferation

in PRI signatories testifies to the growth in focus

on responsible investment; now the organisation is

shifting its focus towards measurability and ‘impact’.

This push is mirrored by investment consultants,

who are increasing their emphasis on assessing fund

managers’ ESG credentials. Civil society and NGOs

are increasingly waking up to the influence of the

investment chain. They are turning their attention

towards investors to support the achievement of

societal goals, as exemplified by the recently launched

Sustainable Development Goals.

From a corporate perspective, the rise of social media

and regulation-driven transparency requirements

for companies could also be defining events for ESG:

companies have nowhere to hide now if they get

something wrong. A major shift in corporate mind-set

appears to be under way, even in the US.

30

Countering this perspective is the interesting/

surprising statistic that only 3% of Bloomberg

terminals have been used to access ESG information

via its dedicated tool, suggesting still limited ESG

integration among investment professionals. The

view was expressed that to effectively embed ESG

considerations in investment processes, senior

management (chief executive/chief investment

officer) buy-in will be important, while from an

asset owner perspective, trustee boards will play an

important role in asset manager selection.

Looking forward, the PRI is focusing its attention

on engaging the asset owner end of the investment

chain; on encouraging sustainability disclosure and

measurability (both at signatory and corporate level) –

“Once you measure something you can improve it”;

and  on reassessing the organisation’s role after its

first  10 years – is its business model fit for purpose

and can it continue to manage its dual role as both

‘educator and examiner’ for signatories?

Asian Corporate Governance Association (ACGA) Discussion Group MeetingThis is an independent organisation that M&G

joined in July 2016, which is dedicated to working

with investors, companies and regulators to improve

corporate governance throughout Asia. The ACGA

hosts regular updates on corporate governance

developments in the regions at both the corporate

and country level, as well as providing a forum for

members to collaborate.

For example, at the meeting in August, the following

issues were discussed:

• Taiwan Stewardship Code. Two officials from the

Taiwan Stock Exchange introduced their new

‘Stewardship Principles for Institutional Investors’

following the lead of other Asian markets. To

date only 14 asset managers have joined (mostly

domestic), but this is expected to change. The process

for joining is relatively simple and the principles are

very similar to those in the UK. An ongoing project

for the Corporate Finance and Stewardship team

is to review the different stewardship codes and

consider endorsing them.

• The Securities and Future Commission along with the

Hong Kong Exchanges and Clearing (HKEx) released

a consultation paper to enhance Hong Kong’s listing

regime. The ACGA is supportive of these changes

due to the current conflict caused by HKEx being

both a regulator and a for-profit company and it

has prepared a draft submission. M&G made its

own submission to support these changes.

Submission to the Brazilian stock exchange BM&F BovespaM&G made a submission to the ongoing review of

the current corporate governance standards by the

Brazilian stock exchange (BM&F Bovespa) highlighting

areas which require strengthening. This is the first

review for five years and the exchange needs to

increase both the rules and their enforcement.

Hampton-Alexander Review: Progress and hurdles to women’s progression in the executive ranks of FTSE 350 companiesFollowing on from the Davies review, which focused

on gender diversity at board level, this Hampton-

Alexander review focuses on how diversity amongst

senior managers below board level can be improved.

M&G attended a roundtable event for investors at

which the conversation centred on how investors can

be assisted in raising this with companies and holding

them to account. The final report was published in

November 2016.

31

BRIBERY & CORRUPTION

TAX CYBER SECURITY

POLITICAL CHANGE BOARD REFRESHMENT

TALENT

PALM OIL

SUSTAINABILITY WATER & WASTE SHAREHOLDER RIGHTS COMPANY REPORTING BOARD EFFECTIVENESS ROLE OF NEDS

RIGHT TO NOMINATE DIRECTORS

SECURITY

LIVING WAGE AUDITOR ROTATION

PHARMA PRICING PAY RATIOS

CORPORATE GOVERNANCE AUDITOR ROTATION RENEWABLES

OVERBOARDING SUPPLY CHAIN

EMPLOYEE REPRESENTATION DIV

ERSI

TY

CLIMATE CHANGE HEALTH & SAFETY ROLE OF NEDS

ETHICS COMMUNITY RELATIONS

Looking ahead

For investment professionals only. Not for onward distribution. No other persons should rely on any information contained within. Issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. JAN 17 / W179302