Corporate Governance: Market Incentives and Sustainable Business

Practices

Abu Dhabi Sustainability GroupForum Quarterly Meeting

14 December 2010

Nick NadalDirector

Agenda• Brief on Hawkamah

• Focus on ESG Reporting

• Index Construction

• Next Steps

As a regional ‘think-and-do-tank’, Hawkamah was created to:

• Bridge the Corporate Governance gap’

• Assist the countries and companies of the region in developing sound, ‘home grown’ and globally well integrated CG frameworks:

– Coordinate and sequence the designing, and implementation of CG reforms

– Monitor the outcomes of CG policies at the public and private sector level.

• “Hawkamah-ICG will serve as a platform for regional co-operation, based on a concrete agenda for measurable and time-bound action, aiming to raise awareness of national, regional and global initiatives and build a coalition for reform”, Joint Declaration OECD-UAE, 2005.

Hawkamah’s approach…

Communication and Policy Dialogue

Knowledge Exchange and

Platform

Technical Assistance

Analysis and Research

Institution Capacity Building

Regional and Regional and NationalNational

Task ForcesTask Forces

Company assessmentsMENA regional survey of banks and listed companiesPower MattersBack to BASICs

Mudara, Institute of Directors

Company secretary

Bank corporate governance awards

ESG Index

Regional policy task forcesAnnual conference Policy DeclarationsEconomic journalismEngage academics

Monthly workshop seriesNewslettersMembership services

Agenda• Brief on Hawkamah

• Focus on ESG Reporting

• Index Construction

• Next Steps

• Objective is to measure the environmental, social and governance attributes of companies and create an index including the companies with the highest ESG scores

• Scoring is done by measuring transparency and disclosure performance of a company

• Scoring is largely binary and based on publicly available information

• Companies are assessed on each parameter separately and then scores are aggregated in a weighted manner to provide a single composite score

ESG Indices

Corporate Responsibility: Evolving focus*Traditional approach to Corporate Responsibility

• Focus on philanthropy or charitable giving• Focus on public relations • Focus on compliance with law and regulatory standards• Limited integration with corporate decision making and processes• Self-selecting disclosure: “greenwashing”

Developing approach to Corporate Responsibility: enlightened self-interest

• Reputation• Competitiveness• Risk • Action beyond compliance undertaken on the basis of a business case

* Drawn from a conference presentation by Simon Deakin, University of Cambridge, Chicago, 2006

Business case for Environmental, Social and Corporate Governance (ESG)• “Mainstream” investor orientation:

• Looking to maximize financial returns subject to specific risk tolerances

• Investing mandate typically does not include a specific social agenda

• Social and environmental factors come into consideration as an important component of stakeholder relations.

• Companies need to maintain positive and constructive relations with key non-financial stakeholders such as employees, customers, communities to:

• Maximize sustainable competitive advantage (business risk)• Minimize operational/reputational risks (financial risk)

• ESG focus is potential impact on investors and stakeholders, both short term and medium/long term

Agenda• Brief on Hawkamah

• Focus on ESG Reporting

• Index Construction

• Next Steps

Measuring ESGWhat knowledge claims can we make?

We can objectively measure certain factors which can serve as proxies or as evidence that might suggest good governance of stakeholder relations. These relate to:

1. Company ESG disclosure

2. Company public commitment to corporate responsibility and corporate governance and to recognized ESG standards:• Structures • Policies• Practices

3. Evidence of mismanagement or value adding management of stakeholder relations

These factors can be objectively assessed and form the foundation of our criteria for assessing ESG.

Approach for Evaluating Companies on ESG Parameters

Qualitative Analysis Corporate data, Media,

Civil Society and Governmental Sources

Company contact

Survey, targeted Questions

Transparency & Disclosure (T&D)Scrutiny of Company Annual Reports, Sustainability

Reports and other Public Disclosures

• Annual report

• Sustainability/Corporate Responsibility Reports

• Website

• Media coverage

• Not for profit organization reports

• Independent assurance reports (if any)

• Government reports

• Regulatory filings

Information Sources used in Company Evaluation

S&P ESG Indices – Transparency & Disclosure

• Corporate disclosure of ESG relevant policies are a critical component for considering their inclusion and weight in the indices.

• Transparency & Disclosure (T&D) of ESG parameters measure the level of awareness which markets and companies possess on these issues

• Obtained from public sources such as annual reports and other disclosures.

• Company surveys may be employed, but often suffer from low response rates.

• Simple, binary scoring, based on yes or no answers

• Used for measuring on all three parameters of governance, environment and social accountability

• May lead to increased pressure on companies to more disclosure more information about these policies

ESG Scoring Process – For T&D

• Transparency and Disclosure - particular indicators considered may vary based on local market practices.

• Existing indices have 197 indicators or questions covering environment, social or corporate governance

• All indicators are scored on a binary (1/0) basis for each disclosure item

• Indicators may include “Extra Point” social indicators, the responses to which are considered at a higher weight

• Weighting of environmental and social disclosure items differs according to sector based on their impact

ESG Scoring – Qualitative Checks

• Qualitative Checks: Compliance with company policies

• Additional screening, to the extent possible with publicly available data, is based on a qualitative assessment of the firm’s adherence to these policies.

• Scores obtained from the T&D process are amended down, if warranted, based on information through media and other independent and public sources on violations of ESG norms

• The compliance process attaches the check on companies own proclamations

• Composite ESG Transparency and Disclosure score is 50% governance and 50% environmental and social; this also may vary by index.

Weights Attached to Sectors for Analysis

Sector En

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Consumer Discretionary High Med Med Med Consumer Staples Med Med High High Energy High High Low Med Financials Low High High Low Health Care Med High High Low Industrials High High Low High Information Technology Low High Low Low Materials High High Low High Telecommunication Services Low High High Low Utilities High High High Med

High=3, Medium=2, low=1

ESG Parameters: Qualitative Screening Framework

Corporate Governance

Environment Employee Relations (Social)

Community (Social)

Customers / Product (Social)

Business Ethics

(Social)

Ownership Structure

Environmental Pollution

Labor Rights Human Rights Product Safety and

Quality

Business Ethics

Shareholder Rights

Natural Resources Use

Employee Health & Safety (H&S)

Community Investment

Monopolistic Practices

Corruption

Transparency, Disclosure and

Audit

Management Policy and

Performance Indicators

Equal Opportunity

Customer Relations

Board Structure and Effectiveness

Employee Relations

Research Results for MENA Companies

• 111 large companies from 10 MENA countries were researched : Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia and the U.A.E.

• Research spans a three year period – 2007,2008,2009

2009 ESG T&D Scores by Country

Source: Standard & Poor’s and Hawkamah.  Charts and graphs are provided for illustrative purposes only. 

* No information was reported in 2009 by the Lebanese companies included in this analysis.

# of Minimum MaximumCountry Stocks Score ScoreBahrain 2 20.1 24.6Egypt 10 5.6 36.7Jordan 2 25.8 26.1Kuwait 15 7.3 18.9Lebanon* 2 --- ---Morocco 12 1.1 21.1Oman 4 9.9 33.3Qatar 12 7.5 29.1Saudi Arabia 41 3.9 35.3UAE 11 8.0 33.4Total 111 1.1 36.7

Number of Stocks by Country (2009)

Source: Standard & Poor’s and Hawkamah.  Charts and graphs are provided for illustrative purposes only. 

Egypt, 10

Jordan, 2

Kuwait, 15

Lebanon, 2

Morocco, 12

Oman, 4

Qatar, 12

Bahrain , 2UAE, 11

Saudi Arabia, 41

S&P ESG India Historical Performance

Source: Standard & Poor’s; Data as of June 30, 2010.  Charts and graphs are provided for illustrative purposes only.  Indices are statistical composites and their returns do not include the payment of any sales charges or fees an investor would pay to purchase the securities the Indexes represent.  Such costs would lower performance.  It is not possible to invest directly in an index.  Past performance is not an indication of future results.  The S&P ESG India Index was launched on January 31, 2008 and was not in existence prior to that date.  All data presented for the S&P ESG India Index prior to January 31, 2008 reflects hypothetical historical performance based on a number of assumptions.  Please see the Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index performance.

Historical Performance (Dec 2004 - June 2010)

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Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10

S&P ESG India S&P CNX Nifty

S&P/EGX ESG Historical Performance

Source: Standard & Poor’s and the Egyptian Exchange (EGX); Data as of June 30, 2010.  Charts and graphs are provided for illustrative purposes only.  Indices are statistical composites and their returns do not include the payment of any sales charges or fees an investor would pay to purchase the securities the Indexes represent.  Such costs would lower performance.  It is not possible to invest directly in an index.  Past performance is not an indication of future results.  The S&P/EGX ESG Index was launched on March 23, 2010 and was not in existence prior to that date.  All data presented for the S&P/EGX ESG Index prior to March 23, 2010 reflects hypothetical historical performance based on a number of assumptions.  Please see the Performance Disclosure at the end of this document for more information on some of the inherent limitations associated with back-tested Index performance.

Historical Performance (June 2007 - June 2010)

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Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10

EGX 30 S&P/EGX ESG

Agenda• Brief on Hawkamah

• Focus on ESG Reporting

• Index Construction

• Next Steps

Next Steps in the Process• Investor Engagement

– Regional Investors (SWFs, asset managers)– International institutional investors

• Launch of the Index – 31 January 2011

• Regulator Engagement

• Firm Engagement

Appendix

25

T&D Template for Assessing Conduct on Governance of MENA Companies• Ownership Structure and Shareholder Rights• Shareholder Capital Disclosure of:• The number of issued and outstanding ordinary shares disclosed.• The number of issued and outstanding other shares disclosed (preferred nonvoting)• The par value of each ordinary share disclosed.• The identity of the largest shareholder• The identity of holders of all large stakes (blocking :> 25%, controlling :> 50%).• The identity of shareholder holding at least 25% of voting shares in total.• The identity of shareholders holding at least 50% of voting shares in total• The identity of shareholders holding at least 75% of voting shares in total• The number and identity of shareholders each holding more than 10%.• Shareholding in the company by individual senior managers.• Shareholding in the company by individual directors.• The description of share classes provided.• A review of shareholder by type.• Cross-ownership.• Extra Point Question• Disclosure that: • Company's articles of association or by-laws are accessible over the web• Shareholder rights Disclosure of:• The contents of any corporate governance charter or code of best practices.• Existence of a Code of business conduct and ethics.• The contents of the Code of business conduct and ethics.• The changes in company’s articles of association• The existence of voting rights for each voting or nonvoting share.• The transparency of the way that shareholders nominate directors to the board.• The transparency of the way by which shareholders convene an extraordinary general meeting.• The transparency of the procedure for initiating inquires with the board.• The transparency of the procedure for putting forward proposals at shareholders meetings.• A formalized dividend policy• The existence of a review of the last shareholders meeting.• Full general shareholders meeting (GSM) minutes.• The existence of a calendar of important shareholders dates.

Financial and Operational InformationFinancial Information Disclosure of:• The company’s accounting policy.• The accounting standards it uses for its accounts.• Whether the accounts meet local accounting standards.• Annual financial statements according to an internationally recognized accounting standard (IFRS/U.S. GAAP).• Notes to annual financial statements according to IFRS/U.S. GAAP.• Independent auditors report with regard to annual financial statements according to IFRS/U.S. GAAP.• Unqualified (clean) audit opinion with regard to annual financial statements according to IFRS/U.S. GAAP.• Disclosure of related party transactions (RPTs): sales to/purchases from, payables to/receivables from related parties.• Indication that RPTs are made on market or non-market terms.• Interim (quarterly or semiannual) financial statements according to an internationally recognized accounting standard (IFRS/U.S. GAAP).• Notes to such financial statements.• Whether these financial statements are audited or at least reviewed.• A basic earning forecast of any kind.• A detailed earnings forecast.• Financial information on a quarterly basis.• Segment analysis (results broken down by business line).• Revenue structure (detailed breakdown).• Cost structure (high degree of detail).• The name of company’s auditing firm.• A copy of the auditors report.• How much the company pays in audit fees to the auditor• Non-audit fees paid to the auditor.• Whether there are consolidated financial statements or whether only the parent or holding company is audited.• Methods of asset valuation.• Information about the method of calculating fixed-asset depreciation.• A list of affiliates in which the company holds a minority stake.• The ownership structures of affiliates.• Extra Point Questions Disclosure that: • Company's independent auditor reports directly to an independent audit committee (at least 66% independent)• Auditor does not also provide non audit services greater in value than 25% of total audit fees• Auditor does not provide any non audit services

Financial and Operational InformationOperational Information Disclosure of:• Details of the kind of business the company engages in.• Output in physical terms (values of sales for services sector companies)• Characteristics of fixed assets employed.• Efficiency indicators.• Any industry-specific ratios.• A discussion of corporate strategy.• Any plans for investment in the coming years.• Detailed information about investment plans in the coming years.• An output forecast of any kind.• An overview of trends in its industry.• The market share for any or all of the company’s businesses.

Financial and Operational Information

Board and Management Remuneration Disclosure of:• The decision-making process for directors’ pay.• The specifics of directors’ pay, including the salary levels.• The form of directors’ salaries, such as whether they are in cash or shares.• The decision-making process for determining managerial (not board) pay.• The specifics of senior management (not board) pay, such as salary levels and

bonuses.• Performance related indicators guiding senior management compensation.

Extra Point Question• Disclosure that: • Board has a formal training program for directors or provides external training

Board and Management Structure and ProcessBoard and management information Disclosure of:• The list of board members (names).• Details about directors other than name and title.• Details about other employment and position of independent directors• Details about the directors’ previous employment and positions.• When each director joined the board.• A named chairman listed.• Details about the chairman, other than name and title.• Details about role of the Board of Directors at the company.• A list of matters reserved for the board.• A list or board committees.• Names of all members of each existing committee.• Whether there are internal audit functions besides the Audit Committee.• Attendance record for board meetings.• The list of senior managers not on the Board of Directors.• The backgrounds of senior managers.• The non-financial details of the CEO’s contract.• The number of shares held in other affiliated companies by managers.• Extra Point Questions Disclosure that: • Independent directors constitute more than 33% of the board. • Independent directors constitute more than 50%of the board.• Independent directors constitute more than 67% of the board.

– (Note here the incremental build up of points if all three are answered positively, which is another way to provide weightings of independence. This should be regardless of whether or not the CEO is also Chairman)• Board size is no less than 7 and no more than 18.• CEO and Chair is not the same person.• Voting in AGM's takes place by poll rather than by a show of hands• Audit committee is over 50% independent• Audit committee is at least 66% independent• Audit committee is 100% independent • Nomination or governance committee is over 50% independent• Nomination or governance committee is at least 66% independent• Nomination or governance committee is 100% independent • Compensation committee is over 50% independent• Compensation committee is at least 66% independent• Compensation committee is 100% independent • A risk management committee exists at the board level• No directors sit on more than 3 other public company boards• All board members have attended more than 75% of board meetings• All board members have attended more than 90% of board meetings• Board conducts regular self evaluation.• Independent board members regularly meet together independently of the company's executive management• Board meets more than 4 times per year.

Business Ethics and Corporate Responsibility

Corporate Governance Disclosure of:• Policy and procedures on whistle blowing• Policy and procedures on insider trading • Contribution to political parties • Corruption

Disclosure of:• Disclosure on policy and procedures on bribery and corruption• Leadership

Disclosure of:• Stated commitment to recognize corporate responsibility standards• CEO statement regarding corporate governance • CEO statement regarding corporate responsibility/CSR • Signatory to recognized global CSR conventions (e.g. Global Compact, Global Sullivan)

Business Ethics Disclosure of:• Publication of CSR report• CSR report audited or independently assured• Report under GRI framework • Social and environmental performance in operational MD&A or operational analysis

T&D Template for Assessing Environment and Social Conduct (E& S) of MENA Companies

Environmental Pollution Disclosure of:• Emissions of greenhouse gases • Emissions of ozone-depleting substances• NOx, SOx and other emissions• Physical or regulatory risks associated with climate change • Policy on management of emissions or regulatory risks associated with climate change

Extra Point Question Disclosure of: • Defined targets relating to emission• A committed carbon credit programme

Natural Resources Use Disclosure of:• Energy consumption broken down by primary energy source• Use of renewable resources of energy• Total energy saved due to conservation and efficiency improvements• Initiatives to reduce energy consumption or energy audit• Defined targets relating to energy conservation• Type of raw materials used • Percentage of materials used that are recycled• Initiatives to improve efficiency of material usage• Policies/Initiatives for management of water use• Total water used • Total water used by source• Policy/initiatives taken for management of hazardous waste• Policy for management of (waste) water discharged

Extra Point Question Disclosure of: • Production of energy efficient products (e.g. solar panels)

T&D Template for Assessing Environment and Social Conduct (E& S) of MENA Companies

Management Policy and Performance Indicators Disclosure of:• Information relating to product life cycle • Incidents of, and fines or non-monetary sanctions for, non-compliance with applicable environmental regulations• Environmental impact of type of transportation used for logistical purposes• Explicit environmental policy • Efforts to preserve biodiversity (e.g. plantation of tree)• Management system/certification regarding environmental practices (that is status on ISO 14001 certification)• Policy on disaster management

Extra Point Question Disclosure of: • EMS in all location/ facilities and 100 % ISO 14001 certification

CommunityHuman Rights Disclosure of:• Policy or code of conduct on addressing human rights (e.g. child labour, forced labour, bonded labour etc.)• Community Investment

Disclosure of:• Explicit policy/statement regarding community investment• Initiatives on community awareness or education • Company participation in public-private initiatives for community development • Description/Amount of total contributions/donations to charitable initiatives (health, education etc)• CUSTOMERS/PRODUCT

Product Safety Disclosure of:• Policy/procedures on recall of product

Anti-trust Disclosure of:• Policies covering fair practices and monopolistic practices• Customer Outreach and Product Quality Disclosure of:• Annual expenditure incurred on customer awareness initiatives• Number of customer satisfaction surveys conducted in a year• Mechanism for redressing grievances and feedback from customer• Policy/procedures for protection of customer confidentiality/privacy• Procedures and programs for adherence to laws, standards, and voluntary codes related to marketing

communications including advertising, promotion and sponsorship• Policy/procedures on customer education regarding product/service provided• Management system/certification regarding product quality (status on ISO 9000/Six sigma)

EmployeesEmployee Relations/Job Creation Disclosure of:• Programs for career development• Initiatives to involve employees in decision making (including intra-management level communication etc.)• Information on policy/rules relating to non-financial benefits to employees (including housing etc.)• Information on policy/rules relating to healthcare• Policy/Rules relating to employee separation and lay off • Policy/Rules for profit sharing (stock options etc.) with lower management/employeeLabor Rights Disclosure of:• Management system/certification regarding employment and labour practices (that is status on SA 8000 certification)• Policy on code of conduct for protecting human rights• Initiatives to enforce the above policy • Number of strikes/ lockouts and the number of employees involved• Extra Point Question Disclosure of: • SA 8000 certification at all locations/facilities• Reference to ILO core convention in code of conduct• Code of conduct applies to supply chain as wellEmployee Health & Safety (H&S) Disclosure of:• Explicit health and safety policy • Incidents of work related injury/ accidents • Initiatives on employee health and safety• Dissemination of health based knowledge and training including awareness about HIV/AIDS• Management system/certification regarding health and safety practices (that is status on OHSAS 18000 certification)Extra Point Question Disclosure of: • OHSAS 18000 certification at all locations/facilitiesEqual Opportunity Disclosure of:• Explicit statement about equal opportunity employer (gender, caste, religion etc.)• The gender breakdown of total workforce• Number of employees by ethnicity or caste (whatever applicable) • Initiatives for promoting employment of women and/or disabled people. • Policy on discrimination in employment/treatment of employees affected with HIV aids • Policy/Rules to address incidence of sexual harassment and recourse Extra Point Question Disclosure of: • The Board of Directors has an independent women director Union Relations Disclosure of:• Number or percentage of employees that are unionized

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