Integrated Governance

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A NEW MODEL OF GOVERNANCE FOR SUSTAINABILITY

A report by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative June 2014

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TABLE OF CONTENTS Message from the UNEP FI Asset Management Working Group

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Executive Summary

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The Large Corporation Today 2.1 Concentration of economic activity 2.2 The socioeconomic ecosystem 2.3 The role of governance 2.4 The value creation process

8 8 8 10 10

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Enabling a Sustainable Strategy 3.1 Integration of ESG issues in the business strategy. Does it pay off? 3.2 Effectively implementing a sustainable strategy 3.3 Board committees and their link to sustainability 3.4 Promoting effective corporate governance practices

13 13 14 15 23

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Current State of Governance 4.1 Are current governance practices adequate?

25 25

5 Integrated Governance 5.1 The Integrated Governance Framework 5.2 Board independence at the individual level 5.2.1 Expertise 5.2.2 Time spent governing 5.2.3 Business ethics 5.2.4 No affiliation 5.3 Board independence at the group level 5.3.1 Size of the Board 5.3.2 Diversity 5.4 Aligning interests 5.4.1 Compensation Structure 5.4.2 Long-term compensation structure 5.4.3 Ratcheting and the use of compensation consultants 5.5 Investor Activism in Executive Compensation 5.6 Long term Active Ownership 5.7 Conclusions

35 35 39 39 41 42 42 43 43 44 45 45 46 47 48 49 52

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53 53 55 58

Responses from Proxy Voting Agencies 6.1 Glass Lewis 6.2 ISS 6.3 Proxinvest

References

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Endnotes

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Acknowledgments

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INTEGRATED GOVERNANCE · A NEW MODEL OF GOVERNANCE FOR SUSTAINABILITY · UNEP FI Asset Management Working Group report 3

MESSAGE FROM THE UNEP FI ASSET MANAGEMENT WORKING GROUP There once was a debate over whether sustainability could be considered financially material. That debate has been fading from view as evidence becomes clear that the parameters of sustainability have a significant role to play in the financial performance of companies. There are now well over 200 academic reports establishing positive an