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Standard Chartered plc

JANUARY 2015 – MARCH 2015

Governance (by the Board)

Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)

Operational performance
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

In January 2015, the Forum was asked to initiate an engagement with Standard Chartered. Significant concerns had been raised publicly by shareholders for some time and the Forum’s involvement marked a material point of escalation by institutions.

The Forum worked with 9 key shareholders through a series of bilateral discussions to develop a collective engagement strategy and a framework to address the concerns which were affecting the long-term value of the franchise.

Shareholders remained supportive of the core strategy of the bank but were clear that bold action was required by the company. The company had made itself available for individual discussions, but shareholders had concluded that the board was not addressing their concerns and that action was required to arrest the deteriorating performance.

Engagement Objectives

The development of a comprehensive and sequenced board and executive succession plan to restore confidence in the stewardship of the business.

Stabilise and improve operational performance, with a focus on cost reduction, risk control and targeted restructuring rather than a full-scale strategic review.

Restore market confidence in capital adequacy, credit quality and balance sheet strength.

Outcome

On 26 February 2015, the company announced the appointment of a new external CEO, a plan to appoint a new Chairman in 2016 and a series of immediate changes to the composition of NonExecutive Directors.

This comprehensive plan of action was well received by shareholders. As a result, participating Members agreed to give management time to stabilise and re-position the business. It was agreed that the engagement had come to a natural conclusion in March 2015.

Investor Forum Reflections

The Chairman and CEO recognised the clarity of the Forum’s feedback. An intense period of engagement clarified investor concerns and the need for immediate and comprehensive action to restore confidence.

Feedback from investors was that the Forum amplified their individual concerns through a consistent framework that provided additional focus and the momentum to drive through change at the company.

Tate & Lyle plc

JULY 2015 – DECEMBER 2015

Governance (by the Board)

Leadership and Succession
Capital Allocation
Execution (by the Management team)

Operational performance
Management information
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

The Forum was asked to initiate an engagement process in July 2015, following a series of profit warnings and a number of investor meetings with the Chairman. 41% of shareholders voted against the remuneration report at the company’s AGM in July 2015, and it was immediately clear that the AGM vote had become a lightning-rod for several complex issues facing the company.

10 Members joined the engagement, representing 37% of the share capital. While there was a recognition that the board had increased its engagement with shareholders, there was a strong desire to ensure that the business better deliver on its strategy.

Engagement Objectives

Establish a comprehensive framework to restore confidence and enhance value.

Improve operational control, business performance and delivery of the strategy.

Improve management information to reducethe risk of further profit warnings.

Increase transparency and consistency of reporting and financial forecasting.

Outcome

The Forum’s bi-lateral discussions with leading shareholders confirmed strong support for the company’s “focus, fix & grow” strategy but identified major concerns regarding the execution of this strategy. A range of concerns were highlighted and incorporated into an engagement strategy that was agreed and shared with the company via the Chairman and SID.

The incoming CFO was able to make a very positive impact, quickly gaining a firm grip on information flows, improving visibility and introducing measures to allow the company to react much more quickly to a more volatile business environment.

The strategic update in November 2015 was well received and, together with tangible actions to improve reporting in a number of specific areas which had been highlighted by the Forum, represented a significant effort to improve shareholder understanding of, and confidence in, the company.

The objectives outlined in the “Tate & Lyle 2020 Ambitions” in November 2015 represented a significant step forward. The five-year timeframe aligned company ambitions with the interests of shareholders seeking to evaluate companies over a long-term investment horizon.

At a meeting between the Forum and the company’s Chairman, SID and CFO in December 2015, the company responded to each of the points raised in the engagement strategy. The meeting demonstrated a clear commitment by the company to address shareholder concerns.

Investor Forum Reflections

Following two years of disappointing performance, 2016 saw a more stable business evolution, improved shareholder relations and a re-rating.
Shareholders recognise the company’s progress and the constructive approach to engagement with the Forum. Most of the shareholders who engaged have remained invested, demonstrating a commitment to resolve problems and enhance value.

Rolls-Royce plc

AUGUST 2015 – MAY 2016

Governance (by the Board)

Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)

Operational performance
Management information
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

The Forum received several enquiries from Members in the summer of 2015 given the deteriorating situation at the company. Given the complex nature of the challenges affecting Rolls-Royce, a number of investors concluded that collective engagement could help to recover value and inform the Operational Review due in November 2015.

Key issues included:

A longstanding difficulty in understanding the financials.
A concern that sales growth may have been prioritised over profitability.
Widespread uncertainty over pricing, profit recognition and cash conversion.
Concern over the company’s operational ability to deliver profitable growth.
A divergence of views between shareholders over the group structure.
The board’s ability to set, and deliver against, a strategy given the profit warnings.
Following a further profit warning, dialogue intensified ahead of the Operational Review.

Engagement Objectives

Through a process of bilateral meetings with 14 shareholders, together holding 34% of the share capital, an engagement strategy was developed and presented to the Chairman in October 2015.

The main objectives were to:

Clarify the key issues to be addressed in the Operational Review.

Establish a framework for shareholders to develop a shared vision for Rolls-Royce.

Identify a roadmap to build confidence in reporting, accounting and cash flow.

Develop metrics that better reflect the long cycle-nature of the business.

Understand shareholder views on engagement with an activist investor.

Evaluate the board’s ability to develop and control the execution of strategy.

Recommend a Stewardship and Strategy Forum.

Outcome

The Operational Review was well received by investors and began the process of addressing many of the engagement objectives. The Chairman, CEO and Director of Investor Relations engaged with the Forum in a clear and proactive way to discuss progress and to identify outstanding concerns.

Rolls-Royce held a key event in April 2016 which brought together executives and board members with a group of investors. The Forum provided input to the structure of the event, the key shareholder concerns and assisted in attracting good investor attendance from a range of institutions. Importantly the Forum helped to encourage involvement from both senior portfolio managers and governance professionals from the investing institutions.

Investor Forum Reflections

This was the most comprehensive engagement to date. The issues were complex, but the Forum was able to bring a focus to the wide range of investor concerns and importantly the company was committed to restoring confidence.
The open approach of the company and the integrated engagement were key to enhancing investor confidence as the incoming CEO took the action needed to stabilise the business and deliver the company’s pipeline of orders.
Although the formal engagement was closed in May 2016, we have maintained close contact with the company. The Forum continues to support open communication with the company as it works to deliver on operational objectives, enhance reporting and transparency, and to articulate long-term strategic objectives more fully.

Royal Dutch Shell plc

DECEMBER 2015 – OCTOBER 2016

Governance (by the Board)

Strategy
Capital Allocation
Corporate Action
Execution (by the Management team)

Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

A number of Members (including 4 of the top 10 shareholders) approached the Forum in December 2015 to express concerns over the terms and value of the proposed acquisition of BG Group plc by Royal Dutch Shell plc (RDS). This followed a significant change in the business environment and material revisions to the synergy potential since the deal had been announced.

While there was recognition of the strategic rationale of the combination, there were also increasing concerns over the economics of the transaction. The acquisition created one of the most intense debates in the investment community for many years.

Given that this engagement involved companies during a formal offer period, the Forum took note of the City Code in its activities and processes.

Engagement Objectives

At a meeting with the Chairman, the Forum asked RDS, on behalf of participating Members, to demonstrate in its subsequent meetings with shareholders that:

The proposed premium paid remained appropriate in the materially changed environment and circumstances;

The balance sheet of the enlarged group would have the financial strength to command the confidence of rating agencies and debt markets; and

The enlarged group would retain the financial flexibility to maintain and grow the existing dividend and pursue an appropriate capital expenditure programme.

There was agreement that it was vitally important for the board to demonstrate that both the premium agreed, and the form of consideration proposed under the original terms, continued to be in the best interest of shareholders.

Outcome

Following the subsequent round of meetings with shareholders and publication of the Prospectus, the Forum reviewed the status of participating Member concerns and subsequently conveyed these at a meeting with the RDS CEO. The following three principal areas of continued concern were discussed:

Valuation and financial risk;
Accountability for the financial commitments outlined in the Circular; and
Post-completion governance and execution.

The need to establish a common understanding of the objectives for the enlarged group, the risks to be mitigated, and the level of reporting and transparency necessary were also discussed.

The engagement was closed in October 2016, as the majority of Members acknowledged the efforts that RDS had made to outline the strategy for the enlarged group and the early integration actions.

Investor Forum Reflections

There continues to be an active debate regarding the approach to long-term capital allocation.
During the engagement, a number of our Members reflected on the longer-term threats that the company faces from decarbonisation, the impact on the energy sector and hence both the demand for, and the future price of, oil and gas.

Cobham plc

APRIL 2016 – DECEMBER 2016

Governance (by the Board)

Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Corporate Action
Execution (by the Management team)

Operational performance
Management information
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

The engagement was initiated in April 2016, after the announcement of a rights issue to address a potential covenant breach. The decision to preserve the dividend payment while raising capital to address financial stress was widely criticised by investors. The rights issue was a major surprise that significantly eroded trust and confidence, and caused a number of shareholders to question the company’s management of financial risk.

Significant concerns were raised with regard to:

The long-term history of capital allocation.
The deterioration in working capital management and free cash flow generation.
The size of the capital raise, the scale of the rights issue discount and the aggregate fees paid, which were seen as tangible costs of a poorly executed diversification strategy.

Engagement Objectives

The Forum conducted in-depth discussions with several key shareholders in Cobham and agreed an engagement strategy that was sent to the Cobham board in June 2016.

Investors believed that in addition to the rights issue that was required to repair financial strength, a comprehensive plan was needed to strengthen and refresh both executive and board skills to better face the challenges ahead.

Outcome

The Forum was able to amplify the voice of leading shareholders, and engaged persistently with the board of Cobham over time. Many of the concerns identified in the engagement strategy and shared with the Chairman in June came into sharp focus and were addressed with the profit warning that accompanied the trading statement in November.

By the end of 2016, Cobham had replaced its Chairman, CEO and CFO and the collective engagement was closed as investors await a new strategy and approach from the new team.

Investor Forum Reflections

The Forum channelled investor concerns and created an engagement strategy that identified the need for a comprehensive package of change to restore confidence, which was ultimately acknowledged by the company.
Investors are hopeful that channels of communication will improve with the new leadership team and that the company will better incorporate shareholder perspectives as it sets out its future direction. Once the new team has confirmed the strategic direction of the company and the board composition, we would welcome the company hosting a Stewardship & Strategy Forum as part of a process to rebuild trust.

Mitie Group plc

SEPTEMBER 2016 – NOVEMBER 2016

Governance (by the Board)

Strategy
Leadership and Succession
Execution (by the Management team)

Operational performance
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

Background

The engagement was initiated in September 2016 following a profit warning. Shareholders were concerned that the management of the business had not given sufficient focus to the core facilities and property management business and had become distracted by acquisitions in other segments. There were also concerns about balance sheet strength, profit and revenue recognition, free cash flow generation and dividend commitments.

Balancing that, shareholders saw a strong market position in the core business, where Mitie delivers value-adding services to clients typically in long-term partnerships.

During the course of this short engagement the company announced the appointment of a new CEO which was well received by shareholders.

Engagement Objectives

Restore investor confidence through a clear focus on the core business and a reassessment of the appropriate risk appetite for the company.

Review, and where appropriate, refresh the composition of the executive team and board.

Outcome

The Forum wrote to the Chairman in October and had a very constructive meeting with the Chairman and CEO-elect in early November. It was evident that they had reviewed the feedback provided in detail and were actively prepared to engage, understand and address investor concerns.

Revenue recognition and cash conversion are acknowledged as a challenge for Mitie (and the sector) and one that we encouraged the new team to review objectively. Investors would value a dialogue on the right disclosure to understand the revenue mix and associated free cash generation better.

There will be several challenges ahead, particularly around expectations for profitability and growth, but with the appointment of a new CEO and the receptiveness of the Chairman, investors felt that there was no immediate need for further collective engagement, and so the engagement was closed in November.

Investor Forum Reflections

With the CEO change, the need for collective engagement was diminished, as investors wait to learn how the strategy will evolve. Nevertheless we were able to effectively convey investor concerns to the company. We believe our framework gave the new management an objective assessment of key shareholder concerns and the most important issues requiring attention from a shareholder perspective.
We remain in contact with the company, and suggest they consider a Stewardship and Strategy Forum in late 2017, following the publication of the 2016 annual report and before the 2017 AGM, to showcase progress.

Sports Direct International plc

JULY 2015 – February 2017

Governance (by the Board)

Strategy
Leadership and Succession
Capital Allocation
Corporate Governance
Execution (by the Management team)

Operational performance
Management information
Reporting and communication

Governance (by the Board)Execution (by the Management team)
StrategyLeadership and SuccessionCapital AllocationCorporate GovernanceCorporate ActionOperational performanceManagement informationReporting and communication

The Forum would not normally report on an on-going engagement in its Review. However, in light of our decision to make public our involvement, and recent announcements from Sports Direct, we have taken this opportunity to provide a comprehensive update.

Background

Institutions have engaged with Sports Direct since its market listing and exercised fully their stewardship responsibilities, both individually and collectively. The Chairman of Sports Direct approached the Forum in early 2015 to discuss the “governance discount” that shareholders applied to Sports Direct.

The Forum has engaged extensively with the Chairman since then, facilitating a process of collective engagement between 12 investors representing 15% of the share capital (33% of the independent shareholders) and incorporating the views of a number of other investors.

During 2015 and 2016 the actions of the company, notably its employment practices, attracted significant media interest resulting in a breakdown in stakeholder relations. Mike Ashley’s appearance at the House of Commons BIS Select Committee in June 2016 culminated in shareholders asking the board, via the Forum, to commit to an independent review of its governance and employment practices.

On 25 August 2016, the Forum took the unprecedented step of publicly announcing its concerns and the request for an independent review given the lack of tangible progress by the board in addressing shareholders’ concerns.

Engagement Objectives

Comprehensive improvement has been sought in the following areas:

Corporate governance, board oversight and effectiveness,
Related party transactions and potential conflicts of interest,
Employment practices,
Acquisition strategy and associated due diligence,
Oversight of key supplier relationships and management of the store portfolio.

Outcome

On 7 September 2016, independent shareholders voted against the reappointment of the Chairman at the AGM. Under new Listing Rules designed to protect the interests of minority shareholders, this required another vote within 120 days. On 20 September 2016, Sports Direct announced that having considered concerns raised by independent shareholders, facilitated by the Forum, the review would be led by an independent party with a wider scope.

Following the AGM the Forum engaged regularly with the Chairman regarding the Independent Review. The Forum provided a substantial list of names of potential review chairs that would meet with shareholder approval, and offered to make introductions if required. The Sports Direct Chairman rejected all but two of these names and ultimately neither candidate decided to progress discussions with the company. In late December the Chairman proposed an alternative candidate to the Forum, who did not meet the criteria that the company itself had used to reject candidates previously identified by shareholders.

The Forum clearly explained to the Chairman of Sports Direct from the outset that it is not the responsibility of shareholders, nor the Forum, to appoint a review Chair. It is the responsibility of company Directors to carry out a public commitment of the board and for shareholders to hold those Directors accountable for their actions.

At the General Meeting on 5 January 2017, a majority of independent shareholders again voted against the re-election of the Chairman.

The announcement on 13 January that the company will move ahead with a review led by RPC (Sports Direct’s long-time legal adviser) is an important development. Shareholders recognise the change taking place at Sports Direct and the clear view of leading institutional shareholders is that an independent review is of vital importance to stabilising the current situation. While shareholders will no doubt raise questions over the independence of the review now to be conducted, this is an active decision by the board that shareholders can evaluate and judge in due course.

Independent shareholders continue to highlight the vital need to appoint a permanent CFO to strengthen the financial discipline of the company

Investor Forum Reflections

A majority of independent shareholders have used their voting rights to demonstrate dissatisfaction with the current arrangements at Sports Direct, and have engaged consistently with the company, escalating through the Forum to seek change.
The call for an independent review was driven by a desire to give Sports Direct the opportunity to gain “a clean bill of health” that would help the Chairman to meet his objective of adding Non-Executive Directors to strengthen the board and build a team of executives to support the entrepreneurial flair of Mike Ashley.
Governance failings and operational mis-steps by the management of Sports Direct have contributed to a 54% decline in its share price since the Chairman approached the Forum in March 2015, representing a significant loss of shareholder value in the context of a 7% rise in the UK market over that time period.
Sports Direct is changing and the Forum continues to work with shareholders to make the case for positive change.

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