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The international business of Federated Hermes (formerly Hermes Investment Management)

PRI reporting framework 2020

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(Proxy) voting and shareholder resolutions

LEA 12. Typical approach to (proxy) voting decisions

12.1. Indicate how you typically make your (proxy) voting decisions.

Approach

Based on

12.2. Provide an overview of how you ensure that your agreed-upon voting policy is adhered to, giving details of your approach when exceptions to the policy are made.

Proxy voting of shares is undertaken by our stewardship team EOS on behalf of the investment teams. We vote in line with our Federated Hermes' Responsible Ownership Principles and the voting guidelines for 21 major countries. Voting guidelines differ by country to reflect the differing regulatory, legal and corporate governance practice that exists. The policy is also in line with OECD and ICGN global governance guidelines. We will vote by exception to the policy where doing so we judge will further the engagement and be most likely to achieve beneficial change.

EOS files shareholder proposals in markets where it is relevant to do so, typically in Germany and the US, either as lead filer or as co-filer alongside other investors. Consistent with our intelligent voting approach, this typically forms part of a wider engagement with the company and is used as a tool for leverage in its dialogue with management.

EOS has a value add and cost-effective mix of automated and manual voting, ensuring coverage of all client equity holdings while focusing our resources on key topics and companies where clients have significant holdings and/ or there are contentious issues or ongoing engagement objectives. Proactive voting exceeds 90% of the value of assets under advice. EOS' 'intelligent' voting approach also enables clients to influence beneficial change through voting and engagement around the vote.

In terms of the process for manual votes, EOS undertakes detailed research into the particular circumstances of each company and the items on the general meeting agenda prior to voting its clients' shares. This includes a careful analysis of the company's annual report, meeting agenda, and any other publicly available information to identify particular issues of concern. Crucially, with any company where there is a live engagement, the context of the specific engagement objectives will also be considered. Our extensive database of company contacts, which includes more than 10 years of details of all communications with companies, is also key to the decision-making process. All of the other inputs - from advisory agencies, brokerages, portfolio managers, news flow and elsewhere - are also considered in arriving at our voting decisions.

We believe that a flexible 'comply or explain' approach to voting is appropriate for most companies. However, to be effective, such an approach requires significant resources at the appropriate level. Our voting recommendations and actions are made by and for experienced and business-oriented investors in order to support companies' sustainability and long-term performance. We believe that the EOS team is well placed to research and make judgments as to the degree to which companies can reasonably comply with local best practice and where exceptions are appropriate.

In cases where we feel it appropriate to vote against management, we will commonly discuss the issue directly with the company ahead of the vote and, where the international business of Federated Hermes as a holding, we will also discuss the issues with the relevant portfolio manager. The aim of these discussions is to establish the facts and circumstances surrounding the issue and check our interpretation of the resolution and its context.

While it is difficult to provide a general description, we will typically vote against management when we consider that a vote with management would not serve the best long-term interests of shareholders. This may be either, for example,  with respect to a proposed  remuneration policy or where we consider there are insufficient skills on the board to govern the company effectively. There may also be specific instances where a vote in favour of management would be actively detrimental to the company, for example in the case of a proposed merger or acquisition that does not look to be in the long-term interests of the company.

EOS always seeks to obtain the required information to make an informed voting decision, but this may not always be possible. Where we vote against the recommendations of company management, we may contact the company, generally in writing, after the meeting to inform them of the decision and the reasons for it. This communication is designed to provide reinforcement of the discussions surrounding the vote and give clear guidance as to our clients' position.

Typically, due to the large number of votes we process on behalf of clients, we do not attend AGMs and vote by proxy. However, we will do so selectively where doing so will further our engagement or to support a resolution we have lodged at the meeting on the rare occasion that we do.

Where we have long-standing concerns that may affect the company's long-term prospects, it will be considered as a candidate for company-specific engagement.

12.3. Additional information.[Optional]

EOS uses Proxy Exchange, the third-party electronic proxy voting platform operated by ISS. EOS also subscribes to ISS's voting research, which it uses as an input to its voting decisions, alongside research issued by other best-in-class providers. While we have developed our own best practice regional principles based on local market standards, we benefit from the additional research and vote processing service ISS provides. The research received from ISS is, however, only one of several inputs that we utilise in reaching a judgement and making voting recommendations to clients.

 


LEA 13. Percentage of voting recommendations reviewed (Not Applicable)


LEA 14. Securities lending programme

14.1. Does your organisation have a securities lending programme?

14.2. Describe why your organisation does not lend securities.

We do not as, a matter of course, participate in securities lending transactions. Fundamentally, we believe that shareholders have a duty to see that the votes associated with their shareholdings are not cast in a manner contrary to shareholders stated policies and economic interests.

14.4. Additional information. [Optional]


LEA 15. Informing companies of the rationale of abstaining/voting against management

15.1. Indicate the proportion of votes participated in within the reporting year in which where you or the service providers acting on your behalf raised concerns with companies ahead of voting.

15.2. Indicate the reasons for raising your concerns with these companies ahead of voting.

Explain

          In order to help progress engagement (driving change), as well as to help clarify matters at hand to inform better voting decisions.
        

15.3. Additional information. [Optional]

EOS interacted with companies around 1,000 meetings in 2019. This would usually be ahead of meetings and as a result of concerns around the vote or an anticipated vote against management.

Where we consider voting against or abstaining on management resolutions or voting in favour of shareholder resolutions opposed by management, and recommending as such to voting clients, we will whenever practicable contact the company before the meeting to discuss our concerns, thus ensuring that we are making a fully informed decision.

It should be noted that EOS vote at over 10,000 company meetings in a year, and so the level of active voting is very high in this context.


LEA 16. Informing companies of the rationale of abstaining/voting against management

16.1. Indicate the proportion of votes where you, and/or the service provider(s) acting on your behalf, communicated the rationale to companies for abstaining or voting against management recommendations. Indicate this as a percentage out of all eligible votes.

16.2. Indicate the reasons why your organisation would communicate to companies, the rationale for abstaining or voting against management recommendations.

Explain

          In order to help progress engagement (driving change), as well as to help clarify matters at hand to inform better voting decisions.
        

16.3. In cases where your organisation does communicate the rationale for abstaining or voting against management recommendations, indicate whether this rationale is made public.

16.4. Additional information. [Optional]

Where we consider voting against or abstaining on management resolutions or voting in favour of shareholder resolutions opposed by management, and recommending as such to voting clients, we will whenever practicable contact the company before the meeting to discuss our concerns, thus ensuring that we are making a fully informed decision.

Where we proactively vote against the recommendations of company management, we will commonly contact the company on our clients' behalf, generally in writing, after the meeting to inform them of the decision and the reasons for it. This communication is designed to provide reinforcement of the discussions surrounding the vote and give clear guidance as to our clients' position. Where we have long-standing concerns that may affect the company's long-term prospects, it will be considered as a candidate for company-specific engagement.

It should be noted that EOS vote at over 10,000 company meetings in a year, and so the level of active voting is very high in this context.


LEA 17. Percentage of (proxy) votes cast

17.1. For listed equities in which you or your service provider have the mandate to issue (proxy) voting instructions, indicate the percentage of votes cast during the reporting year.

Votes cast (to the nearest 1%)

97 %

Specify the basis on which this percentage is calculated

17.2. Explain your reason(s) for not voting on certain holdings

17.3. Additional information. [Optional]

Our stewardship team, EOS, submits vote recommendations on all ballots available to vote in the portfolios for which we have subscribed to their proxy voting service.


LEA 18. Proportion of ballot items that were for/against/abstentions

18.1. Indicate whether you track the voting instructions that you or your service provider on your behalf have issued.

18.2. Of the voting instructions that you and/or third parties on your behalf have issued, indicate the proportion of ballot items that were:

Voting instructions
Breakdown as percentage of votes cast
For (supporting) management recommendations
87 %
Against (opposing) management recommendations
12 %
Abstentions
1 %
100%

18.3. In cases where your organisation voted against management recommendations, indicate the percentage of companies which you have engaged.

88

18.4. Additional information. [Optional]

EOS engaged around 1,000 meetings of the 6,305 where it recommended one or more votes against management. All of their voting recommendations and rationales for not supporting management are published on our website.


LEA 19. Proportion of ballot items that were for/against/abstentions

19.1. Indicate whether your organisation has a formal escalation strategy following unsuccessful voting.

19.2. Indicate the escalation strategies used at your organisation following abstentions and/or votes against management.

19.3. Additional information. [Optional]

Our stewardship team, EOS, has formulated the expectation that companies should proactively seek to have a constructive dialogue with investors following significant shareholder dissent over one or multiple ballot items. We also track information about those companies that experience repeated patterns of significant shareholder opposition for enhanced engagement.


LEA 20. Shareholder resolutions

20.1. Indicate whether your organisation, directly or through a service provider, filed or co-filed any ESG shareholder resolutions during the reporting year.

20.7. Additional information. [Optional]

EOS encourages boards to engage with serious, committed long-term shareholders, including EOS on behalf of its clients. Where boards interact in an active and engaged way with shareholders on issues that affect companies’ long-term value, EOS will see less need to file or support shareholder resolutions. In EOS’ experience, shareholder proposals can be a natural starting point or a catalyst for related dialogue with issuers and thus avail themselves of these opportunities, where appropriate, whether or not EOS recommends voting in favour of the resolution itself. EOS expects boards to address the issues raised by shareholder proposals which receive significant support or where they are material to the company. In addition, EOS views any failure to implement a shareholder proposal that has received majority support as a clear indication of a board of directors not fulfilling its obligations to the owners of the company.

Our stewardship team EOS co-filed a shareholder proposal on behalf of third party clients for one of the largest operators of retail drugstores to annually disclose on the use of its clawback provision on executive compensation. Interest in clawback use in particular relates to the company’s management of its role in opioid use. The proposal was withdrawn to facilitate further engagement on how the company is managing its product governance and stewardship of opioids.

EOS also lead filed a proposal on behalf of third party clients at BP plc which went to a vote. The proposal called for the company to describe how its strategy is consistent with the goals of the Paris Agreement on climate change. More than 99% of votes cast were in favour of the resolution, which was pursued through the Climate Action 100+ collaborative engagement platform. The resolution was also backed by BP itself.


LEA 21. Examples of (proxy) voting activities

21.1. Provide examples of the (proxy) voting activities that your organisation and/or service provider carried out during the reporting year.

ESG Topic
Climate Change
Conducted by
Objectives

EOS supports the Transition Pathway Initiative, (TPI), a global, asset-owner led initiative that assesses companies’ preparedness for the transition to a low carbon economy. In 2019 it introduced the guideline that it would consider recommending a vote against the chair of the board of a company with a management ranking of 0 or 1 by the TPI, unless the company had provided a credible plan to address the climate risks and opportunities of the low carbon transition.

Scope and Process

EOS wrote to 63 companies to advise them of this guideline and to request further engagement ahead of each company’s annual shareholder meeting. It also met over 10 companies, with one Japanese motor vehicle manufacturer agreeing to make improvements to its reporting in response to this engagement. EOS then voted against the chairs of the nominations and governance committees at some companies, citing climate governance as a key reason.

See additional info for more in outcomes. 

Outcomes
ESG Topic
Executive Remuneration
Conducted by
Objectives

EOS believes that companies should design and implement remuneration policies that align the interests of management with the interests of shareholders and incentivise executives to optimise long-term value. Its core objectives concern the implementation by companies of remuneration approaches aligned with the Federated Hermes Remuneration Principles, including the simplification of remuneration schemes, the reduction of variable-to-fixed pay ratios, a focus on strategic goals and increased executive shareholdings.

Scope and Process

EOS’s voting recommendations on pay reflected these concerns, with an overall 33.3% recommended vote against rate in 2019, versus 33.15% in 2018. In the UK EOS opposed 28% of remuneration reports based on concerns such as excessive quantum and pay outcomes not aligned with performance. For example, it opposed the report at a European oil major, where the policy paid out at near maximum. In the US, EOS recommended voting against over 82% of say-on-pay proposals in 2019 due to concerns about quantum and insufficient long-term alignment. Targeting CEO pay in the top quartile of peers is one of the ways it seeks to address quantum, a critical issue in the US following many years of pay ratcheting up. It opposed pay proposals at three US retailers where CEO pay was in the top quartile of peers.

See additional info for more in outcomes. 

Outcomes
ESG Topic
Company leadership issues|Diversity
Conducted by
Objectives

Board composition is critical to the good management of companies and one of the most important shareholder powers is the ability to elect board directors. A diverse board is vital to good decision-making, so EOS stepped up its expectations on gender diversity in 2019.

Scope and Process

In the UK, EOS tightened its policy for board-level gender diversity with a guideline of 30% women for FTSE 100 boards and 25% for FTSE 250. It also introduced a policy on below-board diversity, with the guideline that it would consider recommending a vote against the chair of FTSE 100 companies with no women on their executive committee. In the US, EOS continued to push its expectations on board diversity across a number of dimensions, recommending opposition to 916 proposals in 2019, compared with 618 proposals in 2018.

In Germany, EOS released its new German Corporate Governance principles, which set out its expectations for 2020 and beyond, including that companies achieve 30% female representation on executive boards. Currently, only 8% of German companies have more than one woman on the executive board. Two-thirds still have no female board members. EOS raised the issue of diversity at one German car manufacturer’s annual shareholder meeting, along with concerns about audit tenure that led it to oppose the ratification of the auditors.

See additional info for more in outcomes. 

Outcomes

21.2. Additional information. [Optional]

Example 1 - Outcome

A South Korean car manufacturer was initially ranked level 1 by the TPI. After EOS communicated its voting recommendations and engaged with the company by phone, it disclosed more information about its climate change strategy and emissions in its sustainability report. Its TPI ranking then improved to level 3 in December 2019.

Example 2 - Outcome

At one of the US retailers, which also had an insufficiently strong anti-pledging policy, EOS was able to secure assurances from the company that this would be reviewed and improved before the next annual meeting. After EOS’s engagement with a global bank, it reduced the executive pension contribution rate from 30% to 10%, setting an important precedent for the industry. Similarly, after EOS engaged with a pharmaceutical company and recommended a vote against the 2018 say-on-pay proposal, the company took steps to address EOS’s concerns, agreeing that it needed to better align executive compensation to the long-term success of the company. It increased the minimum shareholding requirements for the CEO to six times base salary, while prohibiting the hedging and pledging of shares by executives. This prevents executives from diversifying out of the stock whilst still meeting minimum shareholding requirements.

Example 3 

Board diversity remains a challenge in many markets, particularly South Korea and Japan. Very few South Korean companies have female directors, although the number of Japanese companies with women on the board has risen in the last year or two. The percentage of women is still low, however, with most companies having only one female director. Following engagement by EOS, one Japanese electrical goods company appointed two new women directors this year, bringing the total to four, or 30% of the board.


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